Key takeaways
- Savings bonds are loans you make to the federal government, which repays you with interest when you redeem.
- Series EE rates are set from Treasury yields and announced every May and November; Series I rates are tied in part to inflation.
- You can cash EE bonds any time after 6 months, but cashing before 5 years costs a 3-month interest penalty.
- Interest on Series EE bonds is exempt from state and local income tax, and federal tax is deferred until redemption or 30 years.
- Some bonds used for education costs may qualify for a federal exclusion, subject to income limits.
U.S. savings bonds let you lend money to the federal government, which pays you back what you paid plus interest when you redeem. They work differently from a savings account, and those differences matter for how you plan. This article explains how the two series sold today earn interest, how they are taxed, and the trade-offs to weigh.
What a Savings Bond Is and Who Issues It
The U.S. Department of the Treasury issues savings bonds and currently sells two series: EE and I. When you buy a bond, you are lending the government money; when you redeem it, you get back what you paid plus interest.
Electronic bonds are bought, managed, and redeemed through a TreasuryDirect account. Older series, such as HH bonds, are no longer issued but can still be redeemed. If you think you have a matured bond you never cashed, the TreasuryDirect tool Treasury Hunt can help you find it.
Series EE vs. Series I: How Each Earns Interest
The two series earn interest in different ways.
- Series EE: The rate is set at 90 percent of the average yield on 5-year Treasury securities. New rates are announced each May and November and apply to six-month earning periods.
- Series I: Part of the rate is fixed and part changes with inflation, so the two series behave differently as prices and market rates move.
| Series EE | Series I | |
|---|---|---|
| How the rate works | Set from 5-year Treasury yields, announced each May and November | Partly fixed, partly tied to inflation |
| Early cash-out | Allowed after 6 months; 3-month interest penalty before 5 years | Redemption rules differ; check TreasuryDirect |
EE bonds are sold at half their face value and are available in denominations from $50 through $10,000. Because EE interest is pegged to market rates that change every six months, there is no way to predict when a bond will reach face value. If rates stay so low that a bond has not reached face value by age 17, Treasury makes a one-time adjustment to bring the value up.
Buying, Owning and Redeeming a Bond
You buy electronic bonds online through TreasuryDirect. To check what an electronic bond is worth, log in to your account; for paper bonds, Treasury offers an online savings bond calculator.
For EE bonds, the key redemption dates are the first 6 months and the 5-year mark.
- You can cash a bond any time after 6 months.
- Bonds cashed before 5 years lose 3 months of interest. A bond cashed after 18 months pays 15 months of interest.
- Bonds held to the full term keep earning until they are 30 years old.
Ownership can be changed, and lost, stolen, or destroyed bonds can be replaced through TreasuryDirect.
Be aware: The 3-month interest penalty applies to any Series EE bond cashed before the 5-year mark. Money you might need sooner is better kept somewhere without a redemption penalty.
How Savings Bonds Are Taxed, Including the Education Exclusion
Savings bond interest has two tax advantages.
- State and local: Interest earned on EE bonds is exempt from state and local income taxes.
- Federal: You can defer federal income tax until you redeem the bond or until it stops earning interest after 30 years. Deferring tax lets the bond compound without a yearly tax bill.
When you redeem, Treasury reports the interest on Form 1099-INT, and you report it on your federal tax return. Some savers can choose to report interest each year instead of waiting until redemption; the rules are in IRS Publication 550.
There is also an education break. Under the Education Savings Bond Program, some people can exclude part or all of the interest from income when they cash qualifying bonds to pay for higher education costs such as post-secondary tuition and fees. The exclusion is figured on Form 8815 and applies to Series EE and I bonds issued after 1989. Your income affects how much can be excluded, so the full benefit is not available to everyone.
The Trade-Offs: Lock-Ups, Penalties and Rates
Savings bonds reward patience and penalize impatience.
- Lock-up: You cannot cash an EE bond in the first 6 months at all.
- Early redemption: Cashing before 5 years costs 3 months of interest.
- Rate movement: EE rates reset every six months with the market, so future earnings are not fixed in advance.
- Long horizon: The full benefit comes from holding for years; bonds earn interest for up to 30 years.
When a Savings Bond Fits and When It Does Not
A bond fits money you are confident you will not touch for years, such as a distant education bill or another long-term goal. It pairs well with a plan where you already automate your savings and want part of the money parked where it is harder to spend.
A bond does not fit money you may need soon. An emergency fund belongs somewhere you can get to it without penalties, as covered in emergency fund basics.
If you are weighing a bond against other options such as certificates of deposit, which also trade liquidity for rate, it helps to read how certificates of deposit compare with savings accounts so you can match the tool to the goal.
Common questions
Q: Can I cash a savings bond whenever I want?
A: Series EE bonds can be cashed any time after the first 6 months. If you cash before 5 years, you give up the last 3 months of interest.
Q: How are savings bonds taxed?
A: Interest on Series EE bonds is exempt from state and local income tax. For federal tax, you generally defer tax until you redeem the bond or it stops earning interest after 30 years.
Q: What is the education exclusion?
A: It is a federal tax break, figured on Form 8815, that lets some people exclude part or all of the interest on bonds issued after 1989 when the money pays for higher education costs. Income limits affect how much can be excluded.
Q: Are savings bonds better than a savings account?
A: It depends on the goal. Bonds suit money set aside for years, while savings accounts keep money available for short-term needs and emergencies.
This article is for general information and education only and isn’t personal financial, tax or legal advice. Rates, fees and rules change, so check current details with the provider or an official source before making decisions.