How Do Savings Bonds Work?

If you’re like me, what you know about U.S. savings bonds is that they’re those weird paper certificates your grandparents used to give you on your birthday – if you’ve even heard of them. But here’s a surprise: Because of a quirk in how certain savings bonds work, they could earn you slightly more than 3.5% a year in interest, if you hold them for the long term. In a world where bank savings accounts offer 0.1% or so, and even high-yield savings accounts are at around 1–2%, that’s a sweet deal.  

Let’s make this crystal clear:

• A $500 Series EE savings bond is worth $1,000, if you hold it for 20 years. A $10,000 bond is worth $20,000 after 20 years. That works out to 3.53% per year.
• The same $10,000 in a savings account earning 2%, compounded monthly, is worth only $14,913 after 20 years.¹  
• You may not even pay tax on the interest if you redeem the bond for higher education expenses.²
• But there’s a catch – they’re worth a lot less if you cash them in before 20 years. 

This article outlines information to help you decide whether savings bonds are a good investment for you, including:

• The two kinds of savings bonds you can buy today.
• Their interest rates.
• Where you can buy them.
• How you cash them in. 

The catch on the 3.5% deal is time – if you cash in the $10,000 Series EE bond a day before its 20th birthday, it’ll be worth only a little more than $10,200. To understand how both things can be true, you need to know how savings bond interest rates work.

There are two types of U.S. savings bonds available today, Series EE and Series I. Here’s how their interest rates work:

• Series EE: For Series EE bonds issued from November 2019 to April 2020, you’ll earn an interest rate of 0.1%. If that seems low, it is. It’s the rate that works out to only $10,200 if you cash in a day short of 20 years, as mentioned above. But the U.S. Treasury “guarantees” you will double your money if you hold a Series EE bond for 20 years.³ So, Treasury makes a one-time adjustment on the 20th anniversary of the day you bought the bond, to value it at double the original face value.
• Series I: These bonds earn a variable interest rate tied to inflation, and there is no doubling promise. Instead, Series I bond interest rates include two components: a fixed rate for the life of the bond, plus a variable component that rises and falls depending on the inflation rate, and is updated twice a year.⁴

For example, for Series I bonds issued from November 2019 through April 2020, the combined interest rate is 2.22%. The two components in this case are a fixed rate of 0.20% and an inflation rate of 2.02%.⁵

As a result, investors can use Series I bonds to protect against rising inflation. For example, if you believe inflation is going to rise from its current low level to the mid-teens, as it did in the 1980s⁶, Series I bonds would be a far better savings choice then Series EE, because the Series I interest rate automatically rises with inflation. But if you think inflation will stay low, and interest rates won’t change much in the next 20 years – and you can afford to park some cash for that long – Series EE bonds might be your choice.  

Both bonds stop earning interest after 30 years.

You can buy savings bonds only directly through the U.S. Treasury, almost exclusively online through TreasuryDirect.gov. The only exception is that you can buy a paper Series I bond with your tax refund, up to $5,000, by filing IRS Form 8888 with your tax return.⁷ Otherwise, you have to set up an online account at TreasuryDirect, tie it to your bank account, and buy Series EE or Series I bonds in electronic form.

Anyone can buy U.S. savings bonds, as long as you’re 18 or older, have a Social Security number, and are a U.S. citizen, U.S. resident, or an employee of the U.S. government. You can also give them as a gift, as long as you know the recipient’s Social Security number, but your recipient must also have an account at TreasuryDirect.

You can purchase either bond in any amount, to the penny, up to $10,000, which is the maximum you can buy each year. For example, you could buy a bond worth $123.45, or $9,902.37. The maximum amount you can purchase for each bond, each year, is $10,000. That’s $20,000 total. But, if you’re getting a tax refund of at least $5,000, you can also get a Series I paper bond, boosting your yearly maximum to $25,000. 

Once they’re at least a year old, you can cash in your electronic bonds any time by logging into your TreasuryDirect account, checking their current value on the “Current Holdings” tab, and following the on-site redemption instructions.⁸ Funds can be transferred to your bank account in two business days. If you have paper bonds – including EE, I, and older Series E bonds which were discontinued in 1980 and no longer accrue interest – you can cash them in at any bank branch. Series HH paper bonds, which were discontinued in 2004, will continue to accrue interest until 2024, and can only be cashed in by mailing them to the U.S. Treasury.⁹