Should You Buy Savings Bonds? What the Numbers Actually Show

Savings bonds are a low-risk way to lend money to the federal government, but whether they make sense for you depends on what interest rates are doing and what you need the money for

A savings bond is a debt security issued by the U.S. Treasury. You give the government money upfront, they pay you interest over time, and you get your principal back at maturity. The two types you can buy as an individual are Series EE bonds (which you buy at half their face value and they double over 20 years if held to maturity) and Series I bonds (which adjust their interest rate every six months based on inflation). Neither can be cashed in for the first year, and if you cash either one before five years, you lose the last three months of interest as a penalty.

Whether they are a good investment for you is not a yes-or-no question. It depends on current interest rates, how long you can lock your money away, and what else you could do with it instead.

Key Takeaways

• Series I bonds currently pay a rate that changes every six months based on inflation, while Series EE bonds pay a fixed rate set when you buy them.
• You cannot cash either type for one year, and cashing before five years costs you three months of interest, so they only make sense if you can leave the money untouched.
• Series I bonds protect you if inflation rises, but Series EE bonds lock in a fixed return that may fall behind if prices climb faster than expected.
• Savings bonds are backed by the U.S. government, so the risk of losing your principal is essentially zero, but the trade-off is lower returns than stocks or corporate bonds typically offer.
• You can buy up to $10,000 per person per calendar year in electronic Series I bonds and $10,000 in electronic Series EE bonds, plus an additional $5,000 in paper EE bonds if you use your tax refund.

How Series I Bonds Work and Why Inflation Matters

Series I bonds are designed to keep pace with inflation. The interest rate has two parts: a fixed rate (set when you buy) and an inflation rate (adjusted every May and November based on the Consumer Price Index). The combined rate is what you earn. If inflation drops, your rate can fall, but it will never go below zero.

The current composite rate for Series I bonds changes every six months. You can check the exact rate on TreasuryDirect.gov before you buy. If you buy in May, you lock in the fixed portion for the life of the bond, but the inflation portion will change in November and every six months after that. This means your income from the bond is somewhat predictable in the short term but can shift over time.

Series I bonds make the most sense if you believe inflation will stay elevated or if you want to protect yourself against the risk that it will. If inflation falls sharply and stays low, a fixed-rate Series EE bond might have been the better choice in hindsight—but you cannot know that in advance.

How Series EE Bonds Work and the Tradeoff of Fixed Rates

Series EE bonds are sold at half their face value. You pay $50 and receive a $100 bond, for example. The bond earns interest every month, and if you hold it for 20 years, the Treasury guarantees it will be worth at least face value (so your $50 becomes at least $100). The current fixed interest rate for new Series EE bonds is set by the Treasury and changes every six months; you can see the rate on TreasuryDirect.gov before you purchase.

The advantage of Series EE bonds is certainty. You know exactly what rate you will earn for as long as you hold the bond. The disadvantage is that if inflation rises above your fixed rate, your purchasing power declines. A 2% return sounds fine until inflation hits 4%—then you are losing ground in real terms.

Series EE bonds are useful if you expect inflation to fall or stay low, or if you simply want to eliminate the uncertainty of a variable rate. They are also useful as a forced savings tool: because you cannot cash them for a year and face a penalty if you cash before five years, they can help you avoid spending money you meant to save.

The Liquidity Problem: When You Cannot Access Your Money

Both Series I and Series EE bonds are illiquid for the first year. You cannot sell them or cash them in during that time, period. After one year, you can cash them, but if you do so before five years have passed, you forfeit the last three months of interest. This penalty is real money.

If you buy a Series I bond in January and cash it in March of the following year (13 months later), you lose three months of interest even though you held it for 13 months. This structure means savings bonds only make sense if you are confident you will not need the money for at least five years, and ideally longer.

Compare this to a high-yield savings account or a money market fund, where you can withdraw your money any day without penalty. If you think you might need the cash within five years, a savings bond is the wrong tool, no matter what the interest rate is.

Comparing Savings Bonds to Other Low-Risk Options

Savings bonds compete mainly with other safe, government-backed investments: Treasury bills, Treasury notes, Treasury bonds, high-yield savings accounts, and certificates of deposit (CDs). Each has different terms and rates.

Treasury bills and notes are sold in shorter terms (a few weeks to ten years) and can be sold before maturity on the secondary market if you need cash. High-yield savings accounts and money market funds offer no penalty for withdrawal and rates that change with the market. CDs lock your money for a set term but typically allow early withdrawal with an interest penalty, and they are insured by the FDIC up to $250,000 per bank.

The main reason to choose a savings bond over these alternatives is if you want the forced discipline of a one-year lockup and a five-year penalty period, or if you specifically want inflation protection (Series I). If you need flexibility or expect to need the money within five years, another option will likely serve you better.

Tax Treatment and How It Affects Your Return

Interest earned on savings bonds is subject to federal income tax but exempt from state and local income tax. You do not pay the tax when the interest is earned; instead, you can choose to pay it either when you cash the bond or when it reaches final maturity (30 years for both Series I and EE). This tax deferral is a small advantage, but it is not enough to overcome a low interest rate.

There is also an education exclusion: if you use the proceeds from a savings bond to pay for may have access to education expenses (tuition and fees at an accredited school), you may be able to exclude the interest from your taxable income. This only applies if you meet income limits and other conditions, and you must have been at least 24 years old when you bought the bond. Check IRS Publication 17 or speak with a tax professional to see if you may have access to.

For most people, the tax deferral and potential education exclusion are minor factors. The main question is whether the interest rate itself is competitive with what you could earn elsewhere.

The Real Question: What Rate Are You Getting?

The usefulness of a savings bond comes down to one thing: the interest rate. If the rate is competitive with what you can earn in a high-yield savings account or a short-term Treasury, and you can commit to leaving the money alone for at least five years, then a savings bond may be worth considering. If the rate is lower and you might need the money sooner, it is not.

Check the current rates on TreasuryDirect.gov before you decide. Compare them to the rates offered by your bank on savings accounts, to CD rates at online banks, and to the rates on Treasury bills and notes. If a savings bond offers a higher rate and you meet the holding requirements, it could be a reasonable part of a diversified savings strategy. If the rate is lower or you need access to your money, choose something else.

Frequently Asked Questions

Can I lose money on a savings bond?

No. The U.S. government backs both Series I and Series EE bonds, so you will get your principal back. Series EE bonds are may provide to reach face value after 20 years. The only way you lose money is if you cash before five years and forfeit three months of interest, but your principal is still safe.

What is the difference between buying bonds on TreasuryDirect and buying them at a bank?

TreasuryDirect is the official government website where you buy bonds directly from the Treasury with no fees. Banks and brokers also sell savings bonds, but they may charge fees or offer older rates. TreasuryDirect is almost always the cheapest option and the easiest way to track your bonds.

Should I buy Series I or Series EE bonds?

Series I bonds protect you if inflation rises; Series EE bonds lock in a fixed return. If you expect inflation to stay high or rise further, Series I makes more sense. If you expect inflation to fall or stay low, Series EE may offer better value. Check the current rates on both and compare them to your inflation expectations.

Can I cash a savings bond before one year?

No. Both Series I and Series EE bonds cannot be cashed for the first 12 months after purchase. After one year, you can cash them, but you will lose three months of interest if you do so before five years have passed.

Are savings bonds a good investment for retirement?

Savings bonds can be part of a retirement strategy, but they are usually too conservative to be your only investment. They are best used for money you want to keep safe and accessible within a specific timeframe, or as a small portion of a larger portfolio that includes stocks and other growth-oriented investments.