What is a Savings Bond?

Does the volatility of the stock market make you anxious? Perhaps you’ve heard about the safety of savings bonds and want to learn more. These low-risk investments may seem to be a secure place to store your money, especially during times of inflation. However, low risk often comes with low returns. So, how do you know if investing in savings bonds is the right choice for you? Whether you are building your retirement portfolio or just looking for a way to invest with minimal risk, use this guide if you want to know: what is a savings bond?

How Do Savings Bonds Work?

When you purchase a U.S. savings bond, you are making a loan to the government. Savings bonds earn interest and mature between 20 and 30 years. You can choose between a savings bond that doubles its value after 20 years or one with an interest rate designed to protect against inflation. When you redeem the bond at the end of the term, you receive the value of the bond plus any earned interest.  

History of Savings Bonds

The U.S. savings bond was first introduced in 1935 by President Franklin D. Roosevelt. As early as 1776, the government issued Treasury marketable securities to raise money. However, these debt instruments could fluctuate in value because of changing market conditions. As an alternative, savings bonds offered a low-risk way to help fund government organization spending.

The U.S. government fully backs savings bonds. Its small denominations also make it easier for more people to save and invest. 

Types of Savings Bonds

Savings bonds are a secure and low-risk investment option. Many individuals choose them to grow their savings over time. These government-issued financial instruments offer a stable way to save money while earning interest. This makes them appealing for new investors or those seeking reliable long-term savings. Various types of savings bonds exist, each catering to different financial goals and preferences. Some options feature fixed interest rates, while others are linked to inflation measures. Understanding these diverse categories is essential for anyone considering savings bonds in their financial strategy. This overview will highlight their unique characteristics, benefits, and purposes. Investors can use this information to make informed decisions about their savings plans.

Series EE Savings Bond

A Series EE savings bond (EE bond) has a 30-year term. The bond accrues a fixed rate of interest every month. On a semi-annual basis, the interest earned is added to the bond’s principal value.

Series EE bonds are guaranteed to double in value if kept for 20 years. Regardless of the interest earned, the EE bond gets a bump in value once it hits the 20-year mark. After 20 years, the interest rate may change for the remainder of its term.

Series I Savings Bond

Series I savings bonds (I bond) protect your investment against inflation. The interest rate paid on an I bond combines a fixed rate plus a rate that changes with inflation. This added rate is adjusted for inflation every six months. Like an EE bond, the interest earned gets added to the I bond’s principal value. 

The primary difference between both types is that an EE bond guarantees to double your investment after 20 years, whereas the I bond protects you from inflation. 

Advantages of Investing in Savings Bonds

Investing in savings bonds can be a secure way to grow savings. These bonds are backed by the government, providing a safe investment option. Unlike stocks and other volatile investments, savings bonds typically offer predictable returns. This contributes to financial stability. They also come with tax advantages, appealing to both new and experienced investors. Overall, investing in savings bonds can be an important part of a balanced financial strategy. They promote long-term growth while reducing risk.

Safety and Security

Savings bonds are a safe investment option. They are fully backed by the government. Unlike stocks or other market-based investments, savings bonds have a government guarantee on both the principal and interest. This protects your money from market fluctuations. Savings bonds are appealing to conservative investors. They are also a good choice for those near retirement who want to secure their capital. Since savings bonds don’t fluctuate, they provide peace of mind. Your investment is protected from the risks of higher-yield, market-based assets.

Steady, Tax-Deferred Growth

Savings bonds provide a key financial benefit through tax-deferred growth. The interest earned on these bonds does not need to be reported or taxed until the bond is redeemed. This delay allows your investment to compound over time without immediate tax consequences. This tax advantage is especially useful for those with long-term savings goals. Examples include funding a child's education or preparing for retirement. With savings bonds, the interest can grow undisturbed, which enhances the overall return. In some cases, such as when used for education expenses, savings bonds may also offer additional tax benefits. This makes them a practical and low-maintenance option for gradual and predictable growth.

Low Entry Cost and Accessibility

Savings bonds are accessible to many income levels due to their low minimum investment requirement. This allows various investors to participate, from beginners to more experienced individuals seeking stability. They can be easily purchased and managed online through government websites. This convenience makes savings bonds simple to maintain. The straightforward management process appeals to those who prefer a "set-it-and-forget-it" investment strategy. It offers a practical option for growing wealth without requiring constant monitoring or specialized knowledge.

Limitations and Considerations

In any research or analytical endeavor, it is important to acknowledge limitations and considerations. These factors shape the context of the findings. They also influence the applicability and generalizability of the results. Limitations refer to constraints that can affect the research's robustness. These may include sample size, methodology, and potential biases. Considerations involve broader implications of the research. This includes ethical concerns, environmental impacts, and socio-economic factors that might influence interpretation. By examining both limitations and considerations, researchers can provide a clearer understanding of their work. This approach can guide future studies and inform decision-making. It promotes transparency and supports knowledge advancement in the field.

Lower Returns Compared to Other Investments

Savings bonds are known for their safety. However, this security often results in lower returns. They typically offer lower interest rates compared to more volatile investments such as stocks, mutual funds, or real estate. Due to this conservative structure, savings bonds may struggle to keep up with inflation over long periods. For long-term investors focused on wealth accumulation, the returns on savings bonds may seem limited. As a result, individuals with a higher risk tolerance or those seeking aggressive growth may find that savings bonds do not meet their financial goals.

Limited Liquidity and Holding Period Requirements

Savings bonds have limited liquidity. Many come with specific holding periods. For example, U.S. Series I bonds must be held for a minimum of one year. Cashing out before five years can lead to penalties. This usually means losing a few months' worth of interest. Such restrictions can be a disadvantage for investors needing quick access to funds. This is especially true during emergencies. The lack of immediate liquidity makes savings bonds better for those who can commit to a longer investment horizon. They are not ideal for those who prioritize flexibility.

Interest Rate and Inflation Risk

Inflation and interest rates significantly affect the returns from savings bonds. Series I bonds adjust for inflation, but others have fixed or semi-fixed rates. These fixed rates may not keep pace during high inflation periods. When inflation rises, the purchasing power of savings bond returns can decrease. This reduces their real value over time. In high-inflation environments, the conservative nature of savings bonds may be a disadvantage. Investors may find that their returns do not keep up with the cost of living. Therefore, savings bonds may not be the best choice for those seeking investments that respond better to inflation.

How to Purchase Savings Bonds

You can purchase savings bonds directly from the U.S. government. Below is a step-by-step guide to buying bonds through the government’s website:

1. Visit TreasuryDirect.gov.
2. Click the log-in button if you already have an account. If not, choose the option to open a new account.
3. Select the type of account you would like to open.
4. Enter your personal information, including your Social Security number, e-mail address and banking information. 
5. Set your password and security questions.
6. After you have logged in and you have verified your account, select the Buy Direct option.
7. Choose the specific security and the amount you want to buy.
8. Select “Buy” to complete your purchase.

Today, you can only purchase EE savings bonds online. Most I Bonds are purchased through the government online; however, you can buy a paper bond with your tax refund. 

How to Redeem Savings Bonds

When you redeem a savings bond you held until maturity, you get paid face value plus any interest earned. However, if you cash in a savings bond before maturity, you receive whatever you had paid in plus the earnings.

Whether you hold an electronic or paper savings bond, you can redeem a Series EE or Series I bond once you have owned it for one year. The steps you need to take to redeem a savings bond depend on whether it is electronic or paper. 

Electronic bonds: To redeem a bond purchased online, log in to your TreasuryDirect account and use the Manage Direct link to cash your securities. Here are a few things to keep in mind when redeeming savings bonds online:

• You may cash any amount of $25 or more.
• When cashing only part of what the bond is worth, you must leave at least $25 in your account. Plus, you only receive interest on the portion you cashed. 

Paper bonds: You may only redeem a paper savings bond for its entire value, so you cannot cash out just part of a paper bond.

You can redeem a paper EE or I savings bond at your local bank or credit union. Not every bank or credit union cashes savings bonds, or they place a limit on how much you can cash. So, checking their requirements before you go is a good idea.

You may also mail in a request to the Department of Treasury to cash a paper savings bond. Complete Form 1522 and mail this along with the bonds to Treasury Retail Securities Services.

If you have lost your paper bond, you can get more information using Treasury Hunt. You can search for your bonds by entering your full name, state and Social Security number. If the site finds a match, you will get instructions on what to do next.

The Treasury Hunt site is updated monthly. If nothing matches or the information doesn’t seem current, you can check again next month.

Whether you redeem an electronic or paper bond, you can cash a savings bond once you have held it for at least one year. You are penalized three months of interest if you redeem a bond in less than five years.

When you invest in an EE or I bond, you won’t pay state or local tax on your earned interest. However, you do pay federal tax. You can choose to report your earnings every year. Or you can wait until you have redeemed the bond and report all your earnings at one time.

Best Brokers for Purchasing Savings Bonds

Savings bonds can be a valuable addition to your investment portfolio. Find the best broker for purchasing savings bonds below. 

Balance Out Your Investment Portfolio With Savings Bonds

Savings bonds aren’t particularly exciting investments to add to your portfolio. Yet if safety and low risk are important to you, a savings bond may be the right investment for you. 

Frequently Asked Questions