The definition of a U.S. Savings Bond is an investment in the federal government that helps to increase your money. By purchasing a savings bond, you are essentially lending money to the government which you will get back in the future, when the bond matures, with interest. Because these financial products are backed by the federal government, they are considered to be extremely low-risk. And, in certain situations, there can be tax advantages.
Here’s a closer look at these bonds, including:
• What are savings bonds?
• How do savings bonds work?
• What are the different types of savings bonds?
• How do you buy and redeem savings bonds?
• What are the pros and cons of buying savings bonds?
Savings Bond Definition
First, to answer the basic question, “What is a savings bond?”: Basically, it is a loan issued by the U.S. Treasury and made to the U.S. government. Purchase a savings bond, and you are loaning the money you pay to the government. At the end of the bond’s 30-year term, you receive your initial investment plus the compounded interest.
You may withdraw funds before then, as long as the bond has been held for at least five years.
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How Do Savings Bonds Work?
Savings bonds are issued by the U.S. Treasury. You can buy one for yourself, or for someone else, even if that person is under age 18. (That’s why, when you clean out your closets, you may find a U.S. Savings Bond that was a birthday present from Grandma a long time ago.)
You buy a savings bond for face value, or the principal, and the bond will then pay interest over a specific period of time. Basically, these savings bonds function the same way that other types of bonds work.
• You can buy savings bonds electronically from the U.S. Treasury’s website, TreasuryDirect.gov . For the most part, it’s not possible to buy paper bonds anymore but should you run across one, you can still redeem them. (See below). Unlike many other types of bonds (say, some high-yield bonds), you can’t sell savings bonds or hold them in brokerage accounts.
How Much Are Your Savings Bonds Worth?
If you have a savings bond that has been tucked away for a while and you are wondering what it’s worth, here are your options:
• If it’s a paper bond, log onto the Treasury Department’s website to find out the value.
• If it’s an electronic bond, you will need to create (if you don’t already have one) and log onto your TreasuryDirect account.
Savings Bonds Interest Payments
For U.S. Savings Bonds, interest is earned monthly. The interest is compounded semiannually. This means that every six months, the government will apply the bond’s interest rate to grow the principal. That new, larger principal then earns interest for the next six months, when the interest is again added to the principal, and so on.
3 Different Types of Savings Bonds
There are two types of U.S. Savings Bonds available for purchase — Series EE and Series I savings bonds. Here are the differences between the two.
1. Series EE Bonds
Introduced in 1980, Series EE Bonds earn interest plus a guaranteed return of double their value when held for 20 years. These bonds continue to pay interest for 30 years.
Series EE Bonds issued after May 2005 earn a fixed rate. The current Series EE interest rate for bonds issued May 1, 2023 through October 31, 2023 will earn an annual fixed rate of 2.50%.
2. Series I Bonds
Series I Bonds pay a combination of two rates. The first is the original fixed interest rate. The second is an inflation-adjusted interest rate, which is calculated twice a year using the consumer price index for urban consumers (CPI-U). This adjusted rate is designed to protect bond buyers from inflation eating into the value of the investment.
When you redeem a Series I Bond, you get back the face value plus the accumulated interest. You know the fixed rate when you buy the bond. But the inflation-adjusted rate will vary depending on the CPI-U during times of adjustment.
The current composite rate for Series I Savings Bonds is 4.30% for I bonds issued from May 1, 2023 through October 31, 2023.
3. Municipal Bonds
Municipal bonds are a somewhat different savings vehicle but are worth a quick overview here, if only as a point of comparison. They are issued by a state, municipality, or country to fund capital expenditures. By offering these bonds, projects like highway or school construction can be funded.
Akin to loans that investors make locally to improve their area, these bonds (sometimes called “munis”) are exempt from federal and the majority of local taxes, making them perhaps more enticing to some investors. The market price of bonds will vary with the market, and they typically require a larger investment of, say, $5,000. Municipal bonds are available in different terms, ranging from relatively short (say, two to five years) to longer (the typical 30-year length).
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How To Buy Bonds
You can buy Treasury Bonds directly through the United States Treasury Department online account system called TreasuryDirect, as noted above. This is a little bit different than the way you might buy other types of bonds. You can open an account at TreasuryDirect just as you would a checking or savings account at your local bank.
You can buy either an EE or I Savings Bond in any amount ranging up to $10,000 in penny increments per year. So, if the spirit moves you, go ahead and buy a bond for $49.99. The flexible increments allow investors to dollar cost average and make other types of calculated purchases.
That said, there are annual maximums on how much you may purchase in savings bonds. The electronic bond maximum is $10,000 for each type. You can buy up to $5,000 in Series I Bonds using a tax refund you are eligible for. Paper EE Series bonds are no longer issued.
If you are due a refund and you want to buy I Bonds, be sure to file IRS Form 8888 when you file your federal tax return. On that form you’ll specify how much of your refund you want to use to buy paper Series I bonds, keeping in mind the minimum purchase amount for a paper bond is $50, and the increments rise by $50. The IRS will then process your return and send you the bond that you indicate you want to buy.
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The Pros & Cons of Investing in Savings Bonds
Here’s a look at the possible benefits and downsides of investing in savings bonds. This will help you decide if buying these bonds is the right path for you, or if you might prefer to otherwise invest your money or stash it in a high-yield bank account.
The Pros of Investing in Savings Bonds
Here are some of the upsides of investing in savings bonds:
• Low risk. U.S. Savings Bonds are one of the lowest risk investments you could ever make. You are guaranteed to get back the entire amount you invested, known as principal. You will also receive interest if you keep the bonds until maturity.
• Tax advantages. Savings bond holders don’t pay state or local taxes on interest at any time. You don’t have to pay federal income tax on the interest until you cash in the bond.
• Education exception. Eligible taxpayers may qualify for a tax break when they use U.S. Savings Bonds to pay for qualified education expenses.
• No fees. Unlike just about every other type of security, you won’t pay a fee, markup or commission when you buy savings bonds. They’re sold at face value, directly from the Treasury, so what you pay for is what you get. If you buy a $50 bond, for example, you’ll pay $50.
• Great gift. Unlike most securities, people under age 18 may hold U.S. Savings bonds in their own names. That’s what makes them a popular birthday and graduation gift.
• Patriotic gesture. Buying a U.S. Savings Bond helps support the U.S. government. That’s something that was important and appealed to investors when these savings bonds were first introduced in 1935.
The Cons of Investing in Savings Bonds
Next, consider these potential downsides of investing in savings bonds:
• Low return. The biggest disadvantage of savings bonds is their low rate of return, as noted above. A very low risk investment like this often pays low returns. You may find you can invest your money elsewhere for a higher return with only slightly higher risk.
• Purchase limit. For U.S. Savings Bonds, there’s a purchase limit per year of $10,000 in bonds for each series (meaning you can invest a total of $20,000 per year), plus a $5,000 limit for paper I bonds via tax refunds. For some individuals, this might not align with their investing goals.
• Tax liability. It’s likely you’ll have to pay federal income tax when you cash in your savings bond, unless you’ve used the proceeds for higher education payments.
• Penalty for early withdrawal. If you cash in your savings bond before five years have elapsed, you will have to pay the previous three months of interest as a fee. You are typically not allowed to cash in a bond before the one-year mark.
Here, a summary of the pros and cons of investing in savings bonds:
| Pros of Savings Bonds | Cons of Savings Bonds |
|---|---|
• Low risk • Education exception • Possible tax advantages • No fees • Great gift • Patriotic gesture | • Low returns • Purchase limit • Possible tax liability • Penalty for early withdrawal |
When Do Savings Bonds Mature?
You may wonder how long it takes for a savings bond to mature. The EE and I savings bonds earn interest for 30 years, until they reach their maturity date.
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How to Cash in Savings Bonds
Wondering how and when to redeem a savings bond? These bonds earn interest for 30 years, but you can withdraw penalty-free after five years.
• If you have a paper bond, you can cash it in at your bank or credit union. Bring the bond and your ID. Or go to the Treasury’s TreasuryDirect site for details on how to cash it in.
• For electronic bonds, log into your TreasuryDirect account, click on “confirm redemption,” and follow the instructions to deposit the amount to a linked checking or savings account. You will likely get the money within two business days.
• If you inherited or found an old U.S. Savings Bond, you may be able to redeem savings bonds through the TreasuryDirect portal or via Treasury Retail Securities Services.
Early Redemption of Bonds
If you cash in a U.S. Savings Bond after one year but before five years, you’ll pay a penalty that is the equivalent of the previous three months of interest. Keep in mind that for EE bonds, if you cash in before holding for 20 years, you lose the opportunity to receive the doubled value of the bond that accrues after 20 years.
The History of US Savings Bonds
America’s savings bond program began under President Franklin Delano Roosevelt in 1935, during the Great Depression, with what were known as “baby bonds.” This started the tradition of citizens participating in government financing.
The Series E Saving Bond contributed billions of dollars to financing the World War II effort, and in the post-war years, they became a popular savings vehicle. The fact that they are guaranteed by the U.S. government makes them a safe place to stash cash and earn interest.
The Takeaway
U.S. Savings Bonds can be one of the safest ways to invest for the future and show your patriotism. These bonds can be especially great gifts for minors. But they can also add a risk-free guaranteed return to your portfolio. While the interest rates are typically low, for some investors, knowing that the money is being securely held for a couple of decades can really enhance their peace of mind.
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FAQ
What is a $50 savings bond worth?
The value of a $50 savings bond will depend on how long it has been held. You can log onto the TreasuryDirect site and use the calculator there to find out the value. As an example, a $50 Series I bond issued in 2000 would be worth more than $183 today.
How long does it take for a $50 savings bond to mature?
The full maturation date of U.S. savings bonds is 30 years.
What is a savings bond?
A savings bond is a very secure way of investing in the U.S. government and earning interest. Basically, when you buy a U.S. Savings Bond, you are loaning the government money, which, upon maturity, they pay back with interest.
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SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
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