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Banking 101: How Do Savings Bonds Work?


Written by Dave Grant | Published on 3/8/2019

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

Savings bonds are low-risk savings products that pay interest for the time period in which you own them. The products, available for purchase from Treasury Direct, are part of a government program started by President Franklin D. Roosevelt in 1935. It allowed the Treasury Department to sell U.S. Savings Bonds as a type of security to the American public.

In the 1940s, savings bonds helped finance World War II, and by the 1950s, they became an increasingly popular way for families to add diversity to their nest eggs with low-risk, interest-gaining securities. The program went digital in 2012, when the paper bond was eliminated in favor of digital purchases through TreasuryDirect.gov.

How do savings bonds work?

Savings bonds are a fixed-income investment insured by the U.S. government. A bond is purchased for a set dollar amount, interest accrues for the time period of the bond, and then the original investment and the accrued interest are paid when the bond is redeemed. Depending on the type of bond that is purchased, they either earn a fixed rate of interest for a set period (usually up to 30 years), or a variable rate of interest that changes every 6 months. The most common type of U.S. Savings Bond still in circulation is the Series EE Savings Bond, which can be bought and redeemed on TreasuryDirect.gov.

There are some restrictions that come with savings bonds that are important to know. First, bonds are subject to federal income tax. However, they are not subject to state and local income tax. If you’re looking to use your Series EE Bonds to fund your (or your children or grandchildren’s) higher education, you may be excluded from owing federal income tax on the interest earned.

Currently, all Series EE bonds earn interest for up to 30 years. You can cash them in as soon as one year after your purchase date, but if you choose to cash them in before holding your bonds for five years, you’ll lose the last three months’ worth of interest. U.S. citizens can purchase up to $10,000 in bonds each calendar year, and they are sold in minimum quantities of $25.

Finally, if you own either Series E Bonds, I Savings Bonds or HH/H Savings Bonds, your bonds have earned interest at a different rate. E bonds, however, have stopped earning interest all together, but can still be cashed in.

What types of savings bonds are there?

There are several types of savings bonds currently in circulation, but the Series EE Savings Bond is one of two bonds currently being sold by TreasuryDirect.gov. The Series EE Savings Bond earns a fixed rate of interest for the first 20 years, and the Treasury announces the rate each May 1 and November 1 for all new EE bonds. The Treasury guarantees that the EE bond will double in value by year 20. If the fixed rate of interest was too low to result in a doubling of value, the Treasury will make a one-time adjustment to make up the difference. After year 20, the Treasury may change the rate or the way an EE bond earns interest for the last 10 years until final maturity is reached.

The second type of bond that the Treasury Department sells is the I Bond, which has an interest rate tied to current inflation rates. Paper I bonds earn a combined rate that comprises a fixed rate of return known when you purchase the bond and an inflation rate calculated twice a year based on the Consumer Price Index for All Urban Consumers (CPI-U).

The government no longer sells E Bonds or HH/H Bonds. E Bonds were sold prior to the release of Series EE Savings Bonds. They are no longer earning interest but can still be cashed in. H Bonds were last issued in December 1979, and HH Bonds were issued between 1980 and August 2004.

You can no longer purchase H or HH Savings Bonds, but you can still own them. These bonds were issued on paper and came in denominations of $500, $1,000, $5,000 and $10,000. The interest from HH Bonds is paid directly to your bank account every six months.

Where can you buy savings bonds?

You can purchase U.S. Savings Bonds in two ways:

  1. You can purchase them directly from TreasuryDirect.gov using your own account.
  2. You can purchase paper I Bonds with your federal income tax refund each year.

As of Jan. 1, 2012, financial institutions no longer sell savings bonds. If you’d prefer to purchase a paper bond through the IRS, you can do so by including IRS Form 8888 with your tax return. Complete Part 2 of the form to tell the IRS you’d like to use some (or all) of your tax refund to purchase paper I Bonds. The purchase amount must be in multiples of $50. The rest of your tax refund is then delivered to you via check or direct deposit.

How do you cash in savings bonds?

To cash a U.S. Savings Bond, you must first ensure the bond is valid and you have the legal right to cash it as the bond’s owner. If the bond’s owner is a child who is too young to legally sign the request and understand the transaction, their parents are permitted to cash the bond. If the bond’s owner is deceased, beneficiaries also can cash bonds. Finally, if the bond’s owner has a legal representative, there are special cases in which they can cash the bond for the owner.

As an owner or beneficiary, you can cash your bonds at your local bank. Currently, more than 95% of all savings bonds are cashed at local banks and credit unions. To cash your bonds at a local bank or credit union, you’ll need to bring:

  • Savings bonds you’re cashing
  • Proof of ID
  • If you’re a beneficiary, you’ll also need a certified death certificate for the owner

If you need to request payment outside of the bank or credit union, you can send in the FS Form 1522 to:

Treasury Retail Securities Site

PO Box 214

Minneapolis, MN 55480-0214

If you run into any issues, call 844-284-2676.

If your bond is lost, stolen or destroyed, you need to file a claim. You also have the option to cash them while filing a claim using Form 1048. If your bond serial number is unavailable, you need to provide:

  • Month and year of bond purchase
  • First, middle (if it was on the bond purchase) and last name of bond owner
  • Street address, city and state
  • Taxpayer Identification Number (or Social Security Number) as it appears on the lost, destroyed or stolen bond

Are savings bonds a good investment?

Savings bonds are a safe investment and can make up a portion of an investor’s fixed income portfolio. Although the interest you earn through savings bonds may not be equivalent to what you would earn if you invested those funds elsewhere, the low-risk nature of the investment makes it appealing for many investors. By including savings bonds in part of a larger portfolio, they can provide diversification against other, riskier investments.

There are additional benefits to savings bonds, as well. For example, when saving for education, the bonds can be used to pay for qualified education expenses including tuition, fees and other higher-education expenses. When used for qualified education planning, bonds gain interest tax-free.

Some investors use savings bonds as part of their retirement plan. Investors can use savings bonds to extend the life of their other retirement savings, and they can defer paying taxes on the interest their bonds have earned until they cash them in during retirement.

Savings bonds can also be used as gifts. If you plan to gift savings bonds to an adult, you must have a TreasuryDirect account, and know the recipient’s name, Social Security number (or TIN), and their TreasuryDirect account number. If the bond is a gift to a child to help them begin their nest egg savings or to help cover future education expenses, you’ll need to ensure the child has a TreasuryDirect account through a parent or legal custodian with a minor linked account. Many parents and grandparents choose to gift savings bonds as a way to help their loved ones start saving.

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