Beginner's Guide to US Savings Bonds

Updated: November 1, 2022

US savings bonds are known to be a very safe investment, but tend to have lower rates. However, if you’ve been watching the news and blogs, as of this year the rate for a Series I Bond is at 6.89% and a Series EE Bond is at 2.10%.

To check out the current rates, visit https://www.treasurydirect.gov/

What Are US Savings Bonds?

Savings bonds are loans you give to the US government. You, being the investor, will loan money to the government and they will pay you interest on the money you loaned them. US savings bonds or government bonds are used as debt instruments. The federal government spends more than it receives in taxes, so savings bonds are one way the government addresses this shortfall.

Types of Savings Bonds

There are two types of savings bonds; Series EE and Series I. Both bonds accrue interest which is paid when the bonds are redeemed.

Series EE

Series EE bonds are bonds that earn interest monthly, but compounded interest is gained semi-annually. This means that you will only receive interest on the principal amount each month, and every 6 months they will apply the bond’s interest rate to the balance of the account at that time. The great thing about these bonds is that it is guaranteed to double if you keep it for 20 years. So no matter the interest rate, the government will see to it that you double your money, even if they have to add money to it for that to happen. The account also earns interest for 30 years or until you cash or redeem the bond.

Since May 2005, new EE bonds earn a fixed rate of interest that is set when you buy the bond. They earn that interest for the first 20 years. The government may adjust the rate or the way you earn interest after 20 years. If you have older Series EE bonds, the interest rules will be different and you must visit the Treasury Direct website to determine those rules.

You can purchase as little as $25 and as much as $10,000 (for electronic bonds) and $5,000 (for paper bonds) in a year for the social security number of the name on the bond. This means that you can purchase up to $10,000 for yourself, up to $10,000 for your son or daughter, and $10,000 as a gift for your god son.

As far as taxes, you do have to pay federal income taxes on your earnings, but you do not have to pay state and local income taxes. You also get to choose whether to federally report the year’s earnings each year or wait until you cash the bond to report all the earnings.

You can cash a Series EE bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you only get the first 15 months of interest.

Series I

Series I bonds are bond where you earn both a fixed rate of interest and a rate that changes with inflation. The inflation rate is set twice a year for the next 6 months. Just like Series EE bonds, you earn interest monthly, and earn compounded interest semi-annually.

You can purchase as little as $25 and as much as $10,000 (for electronic bonds) and $5,000 (for paper bonds) in a year for the social security number of the name on the bond and must pay federal income taxes on your earnings, but like the Series EE bonds, you do not have to pay state and local income taxes.

Series I bonds also must be invested for at least 12 months, but cashing out any time under 5 years will result in losing the last 3 months of interest.

Should I Buy A Savings Bond?

To avoid making a costly mistake, you should be asking yourself these 4 questions before purchasing a savings bond.

1. What is the interest rate of the bond?

This is the most important question to ask yourself because the point of investing is to make money on your money. You should first find out how much the interest rate is and compare that to what you’re currently getting on interest for other investments and savings accounts. If the interest for the bond is much higher, this might be a good idea, but if it’s much lower, you may want to keep your money where it is unless you’re investing to avoid major risks.

2. When will I need to use this money?

Savings bonds need to be invested for a minimum of 12 months. If you need the money before then, it is not a good idea to invest in a savings bond. However, if you don’t plan on needing that money for some time, it might be best to let it gain more interest in a savings bond with a higher interest rate than your savings account.

3. How much money do I have to purchase a bond?

The minimum amount to purchase a US savings bond is $25. Although that is pretty low, you should determine how much you’re willing to invest. You also can’t buy more than $10,000 for yourself within a calendar year. Most importantly, if you decide to invest in savings bonds with your money from your [Emergency Fund], you shouldn’t be using more than 50%.

4. Do I have debt with interest rates higher than the current rate?

If you are investing in a savings bond that has an interest rate lower than your current debt interest rates, you’ll actually be losing money. You can save more money by using that investment to pay down your higher interest debt, then once the high interest debt is paid off, you can start investing in bonds. For example; If you have a credit card with a balance and the interest rate is 24.99% and you’re thinking of investing in a savings bond that has 9.62% interest, you’re not gaining 9.62% in interest, you’re paying 15.37% in interest, which is simply just the difference between the two. If the interest rate for the savings bond is higher than your debt interest, you could be making money on this investment. Be sure to run the numbers to make sure it makes sense.

5. Does this fit into my investing strategy?

Before investing, you need to have a strategy. You have to understand why you are investing, how much you are comfortable with losing, the type of investments you want use, the risk associated with those investment types, and when and what it would take for you to withdraw the money. If bonds do not fit into your strategy, it might not be a good fit for you.

How Do I Buy A Savings Bond?

Buying a savings bond is relatively easy, although it might be a bit of a different process than our grandparents went through. Purchasing bonds are now done electronically, so you won’t receive a paper certificate like before. However, if you absolutely want a paper certificate to save under your mattress (which I strongly recommend you don’t), you can only get it through your IRS tax refund by filling out the IRS Form 8888. You will need to specify how much of your refund should go to savings bonds and how much to you directly (by check or by direct deposit to your bank account).

To purchase your bonds electronically, you must have a Treasury Direct account. Create the account on the website and walk through the process of purchasing a bond.

Savings bonds can be a safe way to transport money into the future, but it’s up to you to decide if the investment is worthwhile for your financial future. Look at your financial goals and determine if savings bonds are a useful tool for your portfolio.