U.S. Savings Bonds

U.S. Savings Bonds: Definition, How They Work, Types, and Taxes

Key takeaways
* U.S. savings bonds are low-risk, government-backed debt securities issued by the U.S. Treasury.
* They accrue interest and are redeemable after minimum holding periods; interest is exempt from state and local income tax and federal tax can be deferred until redemption or maturity.
* The two currently issued series are Series EE (fixed-rate, guaranteed minimum return) and Series I (inflation‑adjusted).
* Bonds are non‑marketable, purchased and redeemed through TreasuryDirect, and generally held up to 30 years.

What are U.S. savings bonds?
U.S. savings bonds are debt obligations of the federal government sold to individuals. By buying a savings bond you lend money to the U.S. government; in return you receive a guaranteed return (interest) that accrues over time. Because they are backed by the “full faith and credit” of the U.S. government and are non‑marketable, savings bonds are among the safest retail investments.

How they work
* Purchase: Bonds are bought electronically through TreasuryDirect. You must open an account and link a U.S. bank account and provide a Social Security number.
* Non‑marketable: Savings bonds cannot be bought or sold on secondary markets and are registered to the owner.
* Interest accrual: Interest compounds semiannually and accrues for up to 30 years, after which the bond stops earning interest.
* Redemption rules: You must hold a bond at least one year before redeeming it. Redeeming within the first five years incurs a penalty equal to the last three months’ interest. After five years there is no penalty.

Eligibility and limits
* Eligibility: Individuals who are U.S. citizens, U.S. residents, or certain U.S. government employees may purchase savings bonds.
* Purchase limits: There are annual purchase limits (electronic purchase limits typically up to $10,000 in face value per person per calendar year for each series—check TreasuryDirect for current limits and any paper bond offerings).

Types of savings bonds
Series EE
* Fixed-rate bond with a guaranteed minimum return. The Treasury guarantees that current Series EE bonds issued electronically will at least double in value if held 20 years.
* Interest compounds semiannually and continues up to 30 years.
* Federal tax on interest can be deferred until redemption or maturity; interest is exempt from state and local tax. Under certain conditions, interest may be tax‑free if used for qualified higher education expenses.

Series I
* Designed to protect purchasing power by combining a fixed rate (set at issuance) with a variable inflation rate that adjusts every six months based on the Consumer Price Index (CPI).
* The composite rate can change semiannually. During periods of deflation the inflation component will not drive the composite rate below zero.
* Interest compounds semiannually and accrues for up to 30 years.
* Same federal/state tax treatment and potential education tax exclusion as Series EE under qualifying circumstances.

Other series
* Older series (e.g., Series HH) are no longer issued for purchase, but existing bonds from discontinued series may still earn interest per their terms.

Taxes
* State and local income taxes: Interest from U.S. savings bonds is exempt from state and local income taxes.
* Federal income tax: Interest is subject to federal income tax, but you may elect to defer reporting until the bond is redeemed or matures (or when it stops earning interest after 30 years).
* Education tax exclusion: Under specific income and use conditions, interest may be excluded from federal income tax if proceeds are used for qualified higher education expenses. Check current IRS rules and income limits.

Savings bonds vs. corporate bonds
* Risk: Savings bonds are backed by the U.S. government and carry very low credit risk. Corporate bonds carry higher default risk tied to the issuer’s financial health.
* Return: Corporate bonds generally offer higher yields to compensate for greater risk. Savings bonds typically offer lower, steadier returns.
* Liquidity and transferability: Corporate bonds are marketable and can be sold on secondary markets. Savings bonds are non‑marketable and must be redeemed through the Treasury.
* Taxation: Savings bonds offer state and local tax exemption and potential education tax exclusions; corporate bond interest is fully taxable at all levels.

Frequently asked questions
Q: How long until a savings bond matures?
A: Savings bonds earn interest up to 30 years. Series EE bonds have a 20‑year guaranteed doubling feature for current issues; interest continues to accrue to 30 years. Series I bonds earn for 30 years.

Q: When can I redeem a bond?
A: Earliest redemption is after one year. Redeem within five years and you forfeit the last three months of interest. After five years there’s no penalty.

Q: Where do I buy savings bonds?
A: Purchase electronic savings bonds through TreasuryDirect.gov.

Q: Are savings bonds safe?
A: Yes—because they are backed by the U.S. government, they are considered among the safest investments for preserving principal.

Bottom line
U.S. savings bonds are a conservative, government‑backed savings vehicle suitable for risk‑averse investors seeking a simple, tax‑advantaged way to save. Series EE provides a guaranteed minimum return; Series I offers an inflation hedge. They are best used as long‑term holdings given holding requirements and interest accrual rules.