Savings Bonds

[ 0 ] January 1, 2015 |

A Guide to Investing in U.S. Savings Bonds

U.S. savings bonds are the quintessential slow-and-steady investment. Almost everyone has at least one or two, popular as they are as birthday, wedding and graduation gifts. If you’ve ever wanted to learn more about bonds, here’s what you need to know.

Close up photograph of U.S. Savings Bonds, selective focus.

Savings bonds 101

The Treasury Department issues savings bonds as debt securities to help finance our government’s borrowing needs. In return, the bonds pay interest to the holder. Federal government backing makes savings bonds one of the safest possible investment choices.

Paper bonds are slowly being phased out and replaced by electronic savings bonds, which can be purchased on the Treasury’s website. These new electronic bonds are available in increments of $25 to the penny for any amount between $25 and $10,000. Since June 2003, all savings bonds sold at a discount have been guaranteed to reach face value within 20 years. Those sold for face value are guaranteed to double in that time.

Today’s savings bond choices

Two major types of savings bonds are currently available: EE and I bonds. Both share the following characteristics:

  • They earn interest monthly, compounded semiannually for 30 years.
  • They may be redeemed after 12 months, but cashing in before five years results in the loss of interest on the last three months you own them.
  • Earnings are taxed at the federal level but not by state and local governments.
  • Using these bonds to finance higher education may bring a tax benefit.

At first glance these bonds may seem basically the same. However, they differ significantly in the way they earn interest. I bonds earn a combination of fixed interest and a rate calculated twice a year based on the Labor Department’s consumer price index for all urban consumers (CPI-U). First sold in 1998, I bonds mature in 30 years and currently pay 1.48% annual interest.

EE bonds have been around since 1980, and those issued after May 2005 earn a fixed interest rate for their duration. (Rates of return were calculated differently on earlier bonds.) While both electronic and paper I bonds are sold, you can only buy EE bonds online.

Older bonds and cashing in

A number of older paper savings bond types are no longer available for purchase, and many have stopped paying interest. But all those already issued remain valid, including:

  • H bonds: Last issued in 1979, these are all more than 30 years old and no longer earn interest. If you’re holding H bonds, they’re overdue to be cashed in.
  • E bonds: Sold between 1941 and 1980. These no longer earn interest either and should be redeemed.
  • HH bonds: This series offered between 1980 and August 2004 stops paying interest after 20 years. Any HH bonds more than 20 years old should be cashed in.
  • Patriot bonds: These are actually a version of paper EE bonds issued between 2001 and 2011 to help fund anti-terrorism efforts; they still earn interest.

When it’s time to cash in a bond, take it to a financial institution, such as IAA Credit Union. They should be able to cash all existing paper I or EE bonds directly. They may also be able to help you send those from other series along with signature verification and direct deposit information to Treasury Retail Services at the Federal Reserve Bank of Minneapolis. To redeem electronic bonds, visit the TreasuryDirect website, or you can bring it in to your credit union’s lobby to cash in personally.


Roberta Pescow, NerdWallet

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