Are savings bonds a good investment?
Editorial staff, J.P. Morgan Wealth Management
- Savings bonds have historically been considered lower-risk investments.
- When you buy a savings bond, you’re loaning money to the U.S. government, which is committed to returning the principal with interest.
- Savings bonds may provide inflation protection and come with certain tax advantages, but the returns may be lower than other investments.
If you’re looking for a relatively safe way to diversify your investment portfolio, you might consider savings bonds. Savings bonds are available for purchase to anyone age 18 or older with a valid Social Security number and a U.S. bank account. You can purchase savings bonds for yourself or as a gift for an eligible friend or family member, including a child.
Like all investments, there are possible advantages and disadvantages that come with buying savings bonds. Learning more about how savings bonds work can help you determine whether they could make a good addition to your portfolio.
How U.S. savings bonds work
The U.S. Treasury issues savings bonds to individual investors. A bond is essentially a loan to the U.S. government, and in exchange, the government assures you’ll earn your money back with interest. Unlike traditional bonds that pay interest in regular intervals, you receive the interest on a savings bond once you cash it in or the bond reaches maturity., Savings bonds mature after 30 years.
EE bonds and I bonds: what’s the difference?
There are two types of savings bonds you can choose from: EE bonds and I bonds. Both bonds are purchased electronically and are available in amounts ranging from $25 to $10,000. The main difference between the two is the interest rate and how they’re structured.
When you buy an EE bond, the interest rate is fixed for the first 20 years, and the bond’s value is pledged to double within that time frame. In contrast, for I bonds, the interest rate combines a fixed rate with an inflation-adjusted rate.
It’s a good idea to consider your financial goals when comparing both types of bonds. EE bonds offer fixed interest rates and expected returns, while I bonds have fluctuating rates and may act as a hedge against inflation.
EE Bonds | I Bonds |
|---|---|
Interest rates | |
2.40% for bonds bought from May 1, 2026, to October 31, 2026. New rates are announced every May and November. | 4.26% for bonds bought from May 1, 2026, to October 31, 2026. New rates are announced every May and November. |
How the interest rate works over time | |
This bond’s interest rate remains fixed for at least 20 years from time of purchase. It may change after that for the remaining 10 years of the 30-year bond. | I bonds earn interest at a rate that can change every six months. The rate is a combination of a fixed interest rate and inflation rate that’s calculated twice a year. The bond’s interest rate is assured to never drop below 0%. |
How often interest is calculated | |
Interest is earned monthly, and interest is compounded semiannually. | Interest is earned monthly, and interest is compounded semiannually. |
How much of the bonds you can buy | |
Annually you can buy any amount from $25 to $10,000. You can specify the amount to the penny, for instance, purchasing $102.01 of the bonds. | Annually you can buy any amount from $25 to $10,000. You can specify the amount to the penny, for instance, purchasing $102.01 of the bonds. |
When the bonds reach full maturity | |
At 30 years, though they can be cashed earlier. | At 30 years, though they can be cashed earlier. |
How the bonds are taxed | |
You pay federal income tax, but not state and local income tax in the tax year you report your earnings from the bonds. You may also pay federal estate tax, gift tax, excise tax, state estate tax and inheritance tax if applicable to your situation. | You pay federal income tax, but not state and local income tax in the tax year you report your earnings from the bonds. You may also pay federal estate tax, gift tax, excise tax, state estate tax and inheritance tax if applicable to your situation. |
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Where to buy savings bonds
You can buy savings bonds online through a TreasuryDirect account. This account is free to open, regardless of how much or how little money you plan to invest in bonds. If you don’t have a TreasuryDirect account, you can open one by providing your tax ID number, email address, bank account and routing number.
Once your account is active, you can log in, choose BuyDirect and select to buy either EE or I bonds. During the purchase process, you’ll need to register the bond owner – whether that’s yourself or the person to whom you’re gifting the bonds. You can also register the bonds to a trust, estate, corporation or other entity.
It’s important to note that you can’t buy savings bonds anywhere else besides TreasuryDirect.
When savings bonds mature
Both EE bonds and I bonds reach full maturity 30 years past the date on which they’re issued. Once an electronic bond matures, you’ll find the money in a Certificate of Indebtedness in your TreasuryDirect account.
A savings bond won’t continue to earn interest once it has reached its maturity date. Holding a savings bond past its maturity date could cause you to lose money due to inflation.
How to redeem (in cash) savings bonds
You can cash in a savings bond after owning it for a year, but you’ll earn the most interest if you keep the bond for the full 30 years. A penalty will be incurred if you cash in before five years – you’ll forfeit the last three months of interest you’ve accrued.
You may be able to cash in paper bonds at your bank, but it must be for the entire amount, not just part of the paper bond. Electronic bonds are cashed through a TreasuryDirect account. (The government provides a walkthrough video of this process.) Unlike paper bonds, you can partially cash in an electronic bond, though you must leave at least $25 in your account.
Are savings bonds a good investment?
While savings bonds have historically been a safe investment, how should investors think about them in this current environment?
Jeffrey Kong, Head of J.P. Morgan’s U.S. Wealth Management Portfolio Solutions Group, said: "The benefit of a savings bond is the smaller minimum investment size of $25 versus Treasury bills, notes and bonds, which have a minimum investment of $100. The fact that they aren’t subject to market fluctuations means they offer greater predictability in redemption values, especially when not held to maturity. However, this certainty comes at a cost, in the form of a lower yield and less liquidity."
When evaluating whether savings bonds make sense for you, it may be helpful to compare their interest rates with alternatives like Treasury yields or Treasury Inflation-Protected Securities (TIPS) real yields. It also may be helpful to compare their returns to historical returns of the stock market.
Lastly, you may want to weigh some of the pros and cons of savings bonds.
Pros and cons of savings bonds
Pros
- Historically considered lower risk: Savings bonds are backed by the full faith of the U.S. government, making them a relatively safe investment. Plus, EE bonds are expected to double in value after 20 years.
- Tax advantages: Savings bonds are exempt from state and local taxes, and you have the option to defer federal taxes until you receive the interest payment. You may be exempt from the taxes altogether if certain requirements are met and the funds are used for educational purposes.
- Inflation hedge: If you purchase I bonds, the interest rate adjusts every six months based on inflation, potentially making them a good inflation hedge.
Cons
- Lower returns: Savings bonds may come with lower returns compared to other types of investments, especially during periods of low inflation.,
- Inflexible: You can’t cash in a savings bond until you’ve owned it for at least a year.
- Possible penalties: If you cash in a savings bond before five years from the date of purchase, you’ll forfeit the last three months of interest that you earned.
The bottom line
Savings bonds may be a good option for individuals looking for a potentially lower-risk investment since they’re backed by the U.S. government and may offer inflation protection depending on the bond. However, savings bonds do come with certain limitations, like purchasing limits and a mandatory one-year holding period. It’s a good idea to consider your financial situation and long-term investing goals before purchasing savings bonds.
Frequently asked questions about savings bonds
According to TreasuryDirect, you can determine the value of an electronic savings bond by logging into your TreasuryDirect account. For paper bonds, you can use TreasuryDirect’s Savings Bond CalculatorOpens overlay to determine the value.
The interest earned on savings bonds is subject to federal income tax but is exempt from state and local income tax. You do have the option to wait to report the interest until you actually cash in the savings bond and receive the interest payment.
Some banks and credit unions can redeem paper savings bonds. However, different banks have different policies regarding cashing savings bonds, and some may require you to have maintained an account for a certain number of years.
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Editorial staff, J.P. Morgan Wealth Management
