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Federal government savings bonds are a safe investment option that allows you to set aside money for long-term goals. The financial gain you'll receive may not be as high as what you'd earn by choosing high-return, high-risk investments, but bonds offer other benefits: Their value won't decline, and they can even help protect your money from inflation.
How Savings Bonds Work
A savings bond functions as a loan to the government. When you buy a bond from the U.S. Treasury, you earn interest in exchange for the government's ability to use your money to fund projects. You can buy the two types of traditional savings bonds—I bonds and EE bonds—electronically in amounts of $25 to $10,000 per calendar year. You can buy paper I bonds in amounts of $50 to $5,000 per year. Savings bonds earn interest for up to 30 years.
Savings bond earnings are exempt from state and local taxes, but not federal taxes. The owner of the bond must report interest earned from savings bonds on their federal income tax return. There's one exception: In some cases, you can avoid paying federal tax on savings bonds if you cash them in the same year that you pay for qualified higher education expenses.
You can redeem a savings bond anytime after one year from the date of purchase. Electronic bonds may be redeemed to your checking or savings account via TreasuryDirect.gov. You can cash paper bonds at your local bank, if it offers this service; or you can send your bonds to Treasury Retail Securities Services, which will then deposit the value of the bond to your bank account.
What Are the Types of Bonds?
The two types of U.S. savings bonds are:
- Series I bonds: These bonds use a composite interest rate, which includes a fixed rate and a fluctuating rate based on inflation. The composite rate applies for a period of six months. Currently, the composite rate on I bonds is 7.12% for those purchased through April 2022. You can cash the bond after one year, but if you do so within five years, you'll lose out on the last three months' worth of interest earned. I bonds mature at 30 years.
- Series EE bonds: These bonds earn a fixed interest rate, which is currently 0.10% for bonds purchased through April 2022. The Treasury determines the fixed interest rate for new EE bonds on May 1 and November 1 each year. Once you buy a bond, its rate won't change for the first 20 years of the bond's life, though it may change in the last 10 years. The value of an EE bond is guaranteed to double after 20 years, and it can earn interest for up to 30 years.
Can Bonds Protect Against Inflation?
When inflation increases—meaning the average price of goods and services has gone up—the money you've saved for long-term goals won't go as far as it did when you first stashed it away. This isn't always a crisis, especially if the jump in inflation is temporary. But there are certain investment vehicles available through the Treasury that specifically limit inflation's effect on your savings.
This is a hot topic because the Consumer Price Index (CPI), which measures inflation, rose by 7.9% through February 2022, the highest 12-month increase since 1982. Current average savings account interest rates of 0.06% and 60-month certificate of deposit account rates of 0.29% won't let your money grow fast enough to keep up with inflation. But the current initial I bond interest rate of 7.12%—one of the highest ever—provides the chance to protect the value of your savings from erosion by inflation.
The Treasury also offers Treasury Inflation-Protected Securities (TIPS), which track the CPI. Unlike savings bonds, TIPS can be sold on the secondary market, so you can sell them to someone else before they mature.
Here's how they work: As inflation increases, so does the TIPS' principal. At the maturity date, you'll receive either the original value of the TIPS or the increased value due to changes in the CPI, whichever is larger—letting you avoid a loss in value due to inflation. TIPS come in five-, 10- and 30-year terms, and you can purchase them through TreasuryDirect or via a bank or broker.
Can I Buy Savings Bonds for Children?
It's possible to buy savings bonds on behalf of children, and it may be a useful way to help a child save money from a young age. You can buy EE bonds or I bonds electronically, or you can purchase a paper I bond with your tax return.
To gift savings bonds online, create a TreasuryDirect account and instruct the child's parent or guardian to create accounts for themselves and for the child too. You'll need to provide the child's full name, Social Security number and TreasuryDirect account number to initiate the gift.
The Bottom Line
Savings bonds are often an important element of a balanced investment portfolio. They're a low-risk investment, and while they don't offer a lot of liquidity—or flexibility to use the money before the bond matures—they can help protect your money from inflation and ensure you get a positive return. Gift bonds for children are also an attractive option for a long-term, reliable saving and investing strategy for those newest to the financial world.