What Are the Types of Savings Bonds?
Series EE bonds earn a fixed interest rate and are guaranteed to double in value if held for 20 years. Series I bonds earn a composite rate combining a fixed rate with a variable inflation adjustment that changes every six months. Both types can be purchased electronically through TreasuryDirect.gov, and I bonds can also be bought with tax refunds.
What Are the Tax Advantages?
Savings bond interest is exempt from state and local income taxes. Federal tax can be deferred until you redeem the bond or it matures. If used for qualified higher education expenses, the interest may be completely tax-free at the federal level as well, subject to income limits. This makes savings bonds particularly attractive for education savings.
What Are the Limitations?
You can purchase up to $10,000 in each series per person per year electronically (plus $5,000 in paper I bonds via tax refund). Bonds cannot be redeemed during the first 12 months, and redeeming before five years forfeits the last three months of interest. These restrictions make savings bonds best suited for medium- to long-term goals rather than emergency funds.
Frequently asked questions
Are savings bonds a good investment?
Savings bonds are excellent for safety and tax advantages but offer modest returns compared to stocks or corporate bonds. They work best as a conservative component of a diversified portfolio or for specific goals like education funding.
How do I cash in a savings bond?
Electronic bonds purchased through TreasuryDirect can be redeemed online. Paper bonds can be cashed at most banks or mailed to the Treasury. You will owe federal income tax on the accumulated interest in the year you redeem.