i savings bonds

What Is A Savings Bond And How Does It Work?

i savings bonds

According to SavingsBonds.com, United States Savings Bonds are debt securities issued by the U.S. Treasury Department.  They were created in 1935 to help pay for the government’s borrowing needs as well as offer a low-risk, easy, inexpensive way for Americans to save for their retirement.

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They were very popular during war times to help fund the U.S Defense programs. Backed by the full faith and credit of the U.S. government, they are considered one of the safest savings products available that will never lose money.

EE Bonds purchased since June 2003 that are held for a MINIMUM of 20 years are guaranteed to double in value.

Savings Bonds are non-marketable securities, meaning you cannot buy or sell them unless you are an authorized issuing and redeeming agent designated by The US Treasury Department.

As of January 2012, you can no longer purchase savings bonds at banks or financial institutions. Online electronic versions are now available through Treasury Direct. The only way to “purchase” a paper savings bond is by using your Federal Income Tax refund, which requires filling out government forms.

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  • Series EE and I Savings Bonds are available for purchase.
  • You must have a TreasuryDirect account to buy or sell electronic bonds.
  • You can redeem paper bonds at a bank.
  • You can redeem any time after a 12-month holding period (unless the government declares an emergency and the holding period is waived).
  • If redeeming bonds prior to 5 years, the last 3 months of interest is forfeited.

How Do EE Bonds Work?

  • EE Bonds have been offered since July 1, 1980. They replaced series E Savings Bonds.
  • Earn interest for a total of 30 years.
  • Interest is added to EE bonds monthly and paid when the bond is redeemed (cashed in). Interest is compounded semi-annually.
  • EE Bonds issued since May 2005, will earn a fixed rate of interest, which is set at the time of issuance, for the first 20 years.
  • After the initial 20-year period, an additional 10-year extension and new rate (if applicable) will be initiated (totaling 30 years of interest earnings).
  • EE Bonds issued May 1997-April 2005 earn a rate of interest that changes every six months (variable rate).
  • EE Bonds issued prior to May 1997 earn interest at different rates depending on when they were issued and rules in effect.
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What Is An I Bond?

  • I Bonds have been offered since September 1998.  
  • Earn interest for a total of 30 years.
  • “I” stands for “Inflation.” The main purpose is to protect the bond owner from inflation.
  • I Bonds are an accrual-type security.
  • Interest is earned on the bond every month, from the first day of their issue month.
  • Interest is compounded semi-annually.
  • Unlike EE bonds, they are NOT guaranteed to double in value after 20 years.
  • I Bonds offer an annual interest rate comprised of a fixed rate AND a semiannual inflation rate.

How Do I Bond Interest Earnings Work?

I Bonds offer an annual interest rate comprised of a fixed rate AND a semiannual inflation rate (or variable rate):

Fixed Rate (of return) – this rate remains the same throughout the life of the I bond. The rate was set at the time of issuance.

Variable Inflation Rate – this rate is calculated twice a year.  “The rate is based on changes in the non seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy (CPI-U for March compared with the CPI-U for September of the same year, and then CPI-U for September compared with the CPI-U for March of the following year).” –US Treasury Department.

Note: The earnings rate can not go below zero for I bonds (even during times of deflation) and the redemption value of I Bonds will never decline.

To learn the value of your savings bonds, use a complimentary SavingsBonds.com calculator.

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What Does A Savings Bond Cost?

Paper EE Bonds were purchased for half of their face value. A $100 paper EE Bond would have cost $50 to purchase. You can no longer purchase paper EE bonds as of December 31, 2011.

Note:Paper EE Bonds were offered in denominations of $50, $75, $100, $200, $500, $1,000 and $5,000.

Electronic EE Bonds are purchased AT face value.  An electronic $25 EE bond costs $25. They come in any amount to the penny for $25 or more. Example, you can purchase a $100.62 electronic bond (which costs $100.62).  
Both paper and electronic I Bonds are/were purchased at face value. A $100 I Bond costs $100.00

What Amount Of Savings Bonds Can You Buy?

The maximum amount you can purchase in electronic savings bonds in each calendar year, per social security number (which apply separately below):

  • $10,000 in Series EE Bonds, AND
  • $10,000 in Series I Bonds AND
  • Using your IRS tax refund, another $5,000 in paper series I Bonds.

Exceptions: Savings bonds purchased as gifts for others are not included in your annual purchase limits. Any savings bonds that you transfer, deliver as gifts, or de-link to another TreasuryDirect account holder, is applied to the receiver’s annual purchase limits, and not to your own personal limits.

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Bond Taxes and Advantages

You can put off paying the tax on savings bonds until you file your Federal Income Tax return for the year you redeem the bond, or (in certain cases) when you reissue or re-register the bond, or it reaches final maturity,whichever occurs first.

IRS Publication 550 states if a Savings Bond has reached its FINAL maturity, the interest earned by that bond should be reported in the year it came to final maturity – regardless if the bond was redeemed.

Savings Bond interest earnings ARE subject to:

  • federal income tax (see below when using bonds for education purposes).
  • Any federal estate, gift, and excise taxes, as well as any state estate or inheritance taxes.
  • Savings Bonds are NOT subject to state or local income tax.

When savings bonds are used for higher education, you may be able to avoid paying federal income tax on the savings bond interest. You must meet several qualifications. See details on Bonds For Education.

Can I Report Savings Bond Interest Annually?

Bond owners can elect to report interest earnings each year as it accrues; however, when choosing the annual interest reporting method, all of the bond owner’s accrual-type securities that they currently own, and all future purchases must have interest reported annually.

Annual interest reporting could be especially beneficial for bonds owned by a child.

Note: Once you begin annual interest reporting, you must request to discontinue annual reporting to the Treasury.

SavingsBondsGal Tip: Make certain anyone who may be entitled to your bonds (such as heirs), are aware of any annual interest reporting that is done and they have access to your applicable tax returns. The government does not keep track of your annual interest reporting amounts. When bonds are redeemed ALL of the interest earnings, regardless of what was previously reported, will appear on a 1099-INT. Individuals must provide copies of all applicable tax returns showing the annual interest amounts (already reported), otherwise, they could be faced with a double-taxation situation.

About SavingsBonds.com: SavingsBonds.com is an online financial bond management company providing essential U.S. Savings Bond information since 1992. For over 26 years, bond experts have created various consumer programs, tools and services not offered elsewhere, including an online complimentary savings bond calculator, providing cash in values with important financial information presented on a personalized, color-coded Savings Bond Inventory Report. Unique savings bond management services include signature monthly summary emailed Savings Bond Statements, which help bond owners maximize their investment, avoid losing money and paying unnecessary taxes.

Last Updated: May 20, 2019

About the author

Jackie Brahney is the Marketing and Editorial Director and most notably, an U.S. Savings Bond Expert for SavingsBonds.com. Since 1991, she has done extensive research on savings bonds and state of the art savings bond valuation systems, and heads the company's public relations and marketing initiatives.

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