I Bonds and EE Bonds Explained: How US Savings Bonds Really Work

US savings bonds are loans to the federal government that you buy directly from the Treasury, hold in your own name and cash in later with the interest they have earned. There are two kinds on sale today, Series I and Series EE, and they solve different problems. I bonds are built to keep pace with inflation. EE bonds pay a fixed rate but come with a guarantee to double in value if held long enough.

Neither is exciting, and that is largely the point. Here is how each one works and where they fit among other low-risk options.

Savings bonds versus "regular" Treasuries

Savings bonds are issued by the U.S. Treasury, like Treasury bills, notes and bonds, but they behave very differently.

• They are non-marketable. You cannot sell a savings bond to another investor. You buy it from the Treasury and eventually redeem it with the Treasury.
• Their value does not swing with interest rates. A marketable Treasury note can fall in price when rates rise. A savings bond simply keeps accruing interest.
• They are bought electronically at TreasuryDirect, the Treasury's own website, rather than through a brokerage account.

If you want the background on bills, notes and bonds, our guide to how Treasury securities work covers the marketable side of the family.

How I bonds earn interest

An I bond's rate, called the composite rate, has two parts:

1. A fixed rate that is set when you buy the bond and stays the same for its life.
2. An inflation rate based on changes in the Consumer Price Index for All Urban Consumers (CPI-U), which is reset every six months.

The Treasury announces new rates each May and November. Your own bond's rate changes every six months from its issue date, so the timing of when you buy determines when your rate adjusts.

Two features matter:

• The composite rate can't go below zero. Even if inflation turns negative, the bond won't lose value; it just earns nothing for that period.
• Interest compounds semiannually and is added to the bond's value rather than paid out.

Because the inflation part tracks consumer prices, I bonds tend to look most attractive when inflation is running high and less so when it cools. The fixed rate, which varies from one six-month window to the next, is what determines how much an I bond earns above inflation over the long run. TreasuryDirect publishes the current fixed rate, inflation rate and composite rate.

How EE bonds earn interest

Series EE bonds bought today earn a fixed rate that is set at purchase and doesn't change.

The key feature is a guarantee: the Treasury promises that an EE bond will be worth at least twice its purchase price after 20 years. If the fixed rate on its own wouldn't get the bond there, the Treasury makes a one-time adjustment at the 20-year mark to make up the difference.

That makes EE bonds a long-horizon tool. Cashed early, they earn only their stated fixed rate. Held for the full 20 years, the doubling guarantee produces a predictable minimum return. The bond then keeps earning interest until it reaches its final maturity.

The rules that apply to both

A few more points to know:

• Annual limits. TreasuryDirect caps how much each person can buy electronically per calendar year, and the I bond and EE bond limits are separate. Trusts, businesses and other entities have their own limits. Gift bonds count toward the recipient's limit in the year they are delivered.
• Paper bonds. Paper I bonds were once available through federal tax refunds; the Treasury has since ended that option, so check TreasuryDirect for current purchase methods.
• Liquidity. The 12-month lockup is absolute. Money needed within a year doesn't belong in savings bonds.

How savings bond interest is taxed

Savings bond interest is subject to federal income tax but exempt from state and local income tax, which can make a meaningful difference for residents of high-tax states.

Owners can generally choose between two approaches:

• Defer reporting the interest until the bond is redeemed or stops earning interest, which is what most people do.
• Report the interest each year as it accrues, which can make sense in specific situations, such as for a child with little other income.

There is also an education exclusion. If you use savings bond proceeds to pay qualified higher education expenses, some or all of the interest may be excluded from federal income tax. Eligibility depends on who owns the bond, the owner's age at purchase and income limits that the IRS adjusts each year; the details are on Form 8815 at irs.gov. A tax professional can help confirm whether you qualify.

How savings bonds compare with other safe options

Savings bonds compete with high-yield savings accounts, CDs, money market funds and Treasury bills. Each trades off yield, access and simplicity differently:

• High-yield savings and money market funds let you withdraw at any time but have variable rates.
• CDs lock in a rate for a set term and usually charge a penalty for early withdrawal; deposits at insured banks are protected by FDIC insurance up to its limits.
• Treasury bills are marketable, short-term and state-tax-exempt, and can be bought through TreasuryDirect or a brokerage.
• I bonds add inflation protection but require a one-year lockup and carry a five-year penalty window.
• EE bonds reward patience, mainly through the 20-year doubling guarantee.

Our comparison of money market funds, savings accounts and CDs goes deeper on the bank-side options.

Scenarios where each tends to fit

Savings bonds aren't right or wrong in themselves; they suit some goals better than others.

• Protecting purchasing power on money you won't need for at least a year is the classic I bond use case, especially when inflation is elevated.
• Long-term, low-maintenance saving — for example, money set aside for a child's future — is where the EE bond's 20-year guarantee is most relevant.
• Emergency funds generally fit poorly in the first year because of the lockup, though some savers keep older I bonds as a back-up layer once they are past 12 months.
• Large sums run into the annual purchase limits, so savings bonds usually play a supporting role rather than anchoring a portfolio.

Practical points before buying

• Set up a TreasuryDirect account, which requires a Social Security number, a US address and a US bank account.
• Check the current rates on TreasuryDirect, and note the date your bond's rate will next reset.
• Record your purchase dates; they determine when the 12-month and 5-year marks fall.
• Name a beneficiary or co-owner in your account so the bonds pass smoothly.
• Keep an eye on old paper bonds in the family. Bonds stop earning interest after 30 years, and the Treasury has tools on TreasuryDirect for finding and redeeming matured ones.

Savings bonds are a narrow tool: safe, simple, tax-friendly at the state level and limited in size. Knowing how the I bond and EE bond rules differ makes it easier to judge whether either has a place alongside your other cash and fixed-income holdings.