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Banking Basics

How Do Savings Bonds Work?

Savings bonds are investments you can purchase from the U.S. government that earn you interest over a set period of time. These types of bonds are considered low-risk and also come with tax advantages and a guaranteed return, making them a good savings vehicle for many individuals.

Rachel Velez • March 15, 2022

In This Article

  1. What is a savings bond?
  2. How does a savings bond work?
  3. Types of savings bonds
  4. Are savings bonds a good investment?
  5. How much is my savings bond worth?
  6. How do you cash in a savings bond?
  7. FAQs
  8. Final thoughts

You may have received a savings bond from your grandma as a gift when you were a kid. You might now be wondering, how do these bonds work, are they worth any money today, and if so, how do I cash them in?  

Well, you’re not alone; although savings bonds have been around for a long time, they can still be complicated to understand. Since savings bonds are typically viewed as one of the safer investments out there, those who are a little more reserved with their finances can use them as a way to grow their savings account or investment portfolio without the risk of losing money. 

Read on to discover how savings bonds work, how to cash them in, and the pros and cons of this type of investment. 

What is a savings bond?

A U.S. savings bond is a type of bond, or debt security, issued and backed completely by the federal government. Bonds earn interest by either a fixed or variable rate over a set period of time. You can then receive cash for your savings bond once the time frame has passed, or cash them in early, but you’ll face a penalty and won’t end up with the highest return possible. These securities are offered to U.S. citizens to help fund federal spending and pay for the country’s borrowing needs. 

In other words, the U.S. borrows dollars from its citizens to help stimulate the economy and, in return, provides savings bonds as leverage. Experts view savings bonds as a very safe way to save since they’re issued by the U.S. Treasury and backed by the federal government.

How does a savings bond work?

Since savings bonds are essentially a loan to the government, bond purchases lead to an increase in overall national debt, but ultimately they allow the government to spend and stimulate the economy, so it balances out. The purchasing of bonds can be beneficial for the government, especially in times of a financial crisis.

U.S. savings bonds are issued directly by the U.S. government and are backed 100% by its “full faith and credit,” they carry a much lower risk than other investment options. You can keep a savings bond for a few decades, then get your principal amount back plus interest when you cash it in.

In addition to a small risk, savings bonds can also offer some tax advantages, which makes them a more appealing investment. However, they may not give you as big of a return compared to other types of investments, such as stocks or mutual funds. Another feature that makes savings bonds different from typical bonds or investments is that you can’t transfer or sell the bond to another person.

Types of savings bonds

There are currently 2 types of U.S. savings bonds that can be purchased electronically. Series EE and Series I bonds are no longer available to purchase in paper form, unless you’re using your tax refund to buy up to $5,000 of paper Series I bonds

Let’s look at these 2 options and their characteristics:

Series EE U.S. Savings Bond

The Series EE savings bond took the place of the Series E bond in 1980. These bonds are sold at face value and are worth their full value when cashed in after they have matured. Series EE bonds pay either a fixed or variable rate, depending on when they were issued. Series EE bonds issued after May 2005 earn a fixed rate of interest for the first 20 years, which is paid at maturity or redemption. You’re almost guaranteed that a Series EE bond will double in principal if you hold the bond for at least 20 years. 

Series I U.S. Savings Bond

The Series I savings bond was introduced in 1998, and it comes with a combined fixed interest rate that accrues for up to 30 years and already takes inflation into account. If inflation increases, the interest rate on the savings bond will be adjusted. Similar to the Series EE bond, the Series I bond is sold at face value. When you cash in a Series I bond, you’ll receive the face value and the accumulated interest.

Which Is Better? Series EE vs. Series I

If you’re wondering what savings bond to choose, here’s a closer look at the main difference between the 2 types. Series EE bonds have a fixed rate of return, while Series I bonds come with both a fixed rate and an adjustable rate. Because of this, if you’re looking to cash your bonds out after a few years, a Series I bond will usually promise a better return, as Series EE bonds carry a lower interest rate until they reach their full maturity. 

Series EE bonds offer a guaranteed 3.5% annual return over 20 years when allowed to mature to face value. Series I bonds offer an opportunity to grow interest faster than other guaranteed investments due to market fluctuations. Choosing the right type of savings bond for you is dependent on what you’re looking for in an investment and what works best for your financial plan or situation. 

Are savings bonds a good investment?

Like any investment, there are pros and cons associated with savings bonds. For example, savings bonds can be a good fit if you’re looking for a safe strategy to save money while taking advantage of a few tax breaks. But, they may not be ideal if you’re looking for a big return financially within a smaller time frame.

Here are some advantages and disadvantages to consider while evaluating your personal savings plan as you think about purchasing savings bonds.

Advantages

  • Generally a safe investment: Savings bonds are usually viewed as a more low-risk savings option, as long as you hold them through maturity to get the full amount back, plus interest.
  • Acquire additional tax breaks: When it comes to interest, savings bondholders don’t have to pay state or local taxes and can defer paying federal income tax for as long as they hold it. And if you use Series EE and Series I savings bonds for qualified higher education expenses, you could get an extra tax break.
  • No extra markups or fees: Savings bonds are sold at face value, allowing you to avoid additional markups and fees.
  • Great investment option for kids: Minors can’t hold most securities or investments in their own names; therefore, a savings bond is a popular birthday or graduation gift for kids, as these bonds can be in their name from the very start, no matter their age.

Disadvantages

  • Don’t usually provide significant returns:  As a less-risky option, savings bonds may not deliver as much reward. They usually have lower interest rates than other aggressive investment strategies and won’t serve well for short-term goals.
  • Committed to a long-term investment: You have to avoid cashing in your savings bonds for years and years if you want to get the most money back as possible. You might have to hang on to some for up to 30 years, and cashing them in sooner can take away a huge amount of earning potential.
  • Taxes on interest earned: In most cases, you have to pay federal income tax for the interest your savings bonds earned when you decide to cash them in.
  • Not everyone can buy a savings bond: There are eligibility requirements you must be aware of to buy and redeem savings bonds.

How much is my savings bond worth?

If you were given a savings bond years ago, you might be curious how much it’s worth today. The value of savings bonds typically will increase over time, but it’s easy to lose track of their worth as years have passed. 

When you purchase an electronic bond, you will have to set up a TreasuryDirect account to access it. To find the value of an electronic bond, you can log in to your TreasuryDirect account and follow the prompts to access the information on how much your savings bond is worth. However, for paper savings bonds, you can find the value using TreasuryDirect’s savings bond calculator.

The below information is needed to successfully figure out how much your savings bond is worth:

  • Series: Your savings bond will be a Series I, Series EE, or Series E savings bond. Find this info on the front of your bond or by checking your online account.
  • Denomination: The face value or amount shown on your individual bond.
  • Bond Serial Number: This is a unique number that will help TreasuryDirect find your exact bond.
  • Issue Date: The month and year of when the bond was purchased.

It’s also good to know how to file a claim if you’ve lost your savings bond or had one stolen or destroyed. If this happens, you’ll file a detailed claim form that will ask for the specific information relating to your bond. It’s best to try and keep track of the bonds that you own, especially if you have paper savings bonds.

How do you cash in a savings bond?

As you’re gearing up to use your savings bonds, keep in mind there are different ways you may be able to or may have to redeem them. The most common redemption methods are cashing them in at your bank or using TreasuryDirect to cash them in online.

When you’re ready to cash in an electronic Series EE or Series I savings bond, the process is relatively easy. To exchange your savings bond for cash, you log in to your account on TreasuryDirect and follow the instructions to redeem your bond. The cash value of the bond will usually go into the checking or savings account you specified within a couple of business days.

If you have paper savings bonds, you must bring them to your bank in person. Call your bank before you go to make sure they’re able to cash them, as some banks won’t. You’ll also need to bring a valid photo ID, such as your license or a passport, to verify your identity.

You should always check the value of your savings bonds before redeeming them. Remember, you do have to wait at least 1 year after purchasing a savings bond to cash it in. The only exception to this rule is if you’re affected by a natural disaster. Try to wait as long as you can to cash in your bonds, because their value increases over time as they gain interest, maximizing how much goes into your pocket. 

Once you redeem your savings bond, the bank or TreasuryDirect will send you a Form 1099-INT for tax purposes. If you cash in a paper bond at a financial institution, it may even give you the form while you’re there. Since a savings bond’s interest is subject to federal income tax, you can choose to either report it and pay tax on it every year that you hold the bond or wait until the end and pay the tax all at once.

FAQs

How do I buy savings bonds for kids?

Savings bonds are a great gift for kids and can easily be purchased online at TreasuryDirect.gov. They can be put in your own name or the name of the child, but be prepared to provide the child’s full name and Social Security number. 

If you’re gifting a savings bond, the recipient must have their own TreasuryDirect account to redeem it down the line. If that’s currently not an option, you can hold the gift in your account until one is created for them. 

Is there a purchase limit on savings bonds?

You may buy up to $10,000 in electronic EE bonds or I bonds, and you can use your tax refund to purchase up to $5,000 in paper Series I bonds in a given year. The limits apply to the recipient of bonds, not to the giver, so you can purchase and give as many bonds as you like up to the limit per entity or person.

Where’s the serial number on a savings bond?

To find the value of your savings bond, you’ll need to locate the serial number. The serial number on a paper bond can be found in the lower right corner of the bond, or for an electronic bond, in your TreasuryDirect account. This data is significant for record-keeping purposes, like if your paper bonds were ever lost or destroyed. It’s a good idea to keep a copy of your bond and the serial number in a safe place in case any of these instances were to occur.

What’s a municipal bond?

Municipal bonds are issued by state and local governments and used to fund everyday liabilities or projects meant for the larger good, like fixing roads. They earn interest and have a firm date of maturity. 

Municipal bonds could be a good fit if you’re looking to reduce your taxable income, as the interest they earn is generally not subject to federal income tax. And, if you live in the state where the bond was purchased, you may not pay local or state taxes either.

When do savings bonds mature?

Series I savings bonds fully mature after 30 years. Series EE bonds also reach their final maturity after 30 years, so they can earn interest for that whole period of time. You can redeem both types of bonds as early as 1 year after purchase, but you’ll face a penalty. If you do redeem them before they fully mature, you’ll give up the last 3 months of interest. 

Final thoughts

Many Americans consider savings bonds to be good investments with low risk compared to other investment routes. If you’re considering savings bonds to boost your savings, they may be a good option, especially if you’re willing to let them mature to get more cash.

With just some basic information about savings bonds, you can make an educated decision about whether they’re a fit for your investment strategy. If you want to learn more about how savings bonds can be part of your overall financial plan, you can speak with a financial advisor to find out what type of bond will work best for you. 

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