Savings Bonds

Savings bonds are a form of government bond intended for sale to the public. Like all bonds, savings bonds are considered debt securities, financial instruments that represent a debt owed to the holder of the instrument. Essentially, a bond holder lends the issuer a particular sum of money for a specific period of time; in exchange, he or she receives interest on that sum, which may be paid to the bond holder in regular installments or as a lump sum when the savings bond is eventually redeemed. The United States has issued a number of types of savings bonds since their introduction in 1935, and terms and interest rates have varied significantly over the decades. By the early twenty-first century, series EE, series HH, and series I bonds were most common, with series EE and series I bonds continuing to be issued as of 2024. Although savings bonds were long available for purchase in paper form from banks and other financial institutions, the US Treasury has moved away from paper bond certificates and in 2012 made most bonds available for purchase only in electronic form from the federal government’s TreasuryDirect website.

Background

Although a twentieth-century invention, US savings bonds are in many ways an extension of a centuries-old concept. Bonds have long been offered by federal and municipal governments as well as corporations as a means of raising money for expenses, such as the costs of outfitting a military. However, they often appealed primarily to serious investors rather than the average person. Savings bonds were introduced to the United States in 1935, during the administration of President Franklin D. Roosevelt, as an attempt by the US Treasury to encourage average Americans to get involved in funding their nation’s government. Beginning with series A bonds, the early savings bonds were offered in small denominations and designed to be low-risk investments backed by the strength and stability of the US government. The reasury ultimately sold about $4 billion worth of savings bonds during the first six years that these early bonds were available.

Over the following decades, a number of new savings bonds were introduced as others were discontinued. Savings bonds were sold in paper form at financial institutions and, in some rural communities, post offices. They could also be purchased as part of a payroll savings plan. During the first decade of the twenty-first century, the Treasury began to transition toward the sale of electronic bonds, and it phased out the sale of most paper bonds on the last day of 2011. However, series I bonds remain available in paper form if purchased using one’s federal tax refund up until the end of 2024. The Treasury announced that it will no longer issue paper bonds beginning in 2025.

Different series of savings bonds have different terms and requirements, but the overall concept remains largely the same regardless of series. Any individual over the age of eighteen who has a Social Security number and is a US citizen, permanent resident, or civilian employee is eligible to purchase savings bonds, as are entities such as corporations or trusts. Individuals under the age of eighteen may not buy savings bonds but may be given them as gifts. After being purchased, typically for either face value or half of face value, savings bonds begin to accrue interest based on the specific bond’s interest rate. Depending on the type of bond, the bond holder may receive regular interest payments via direct deposit or may receive all of the accrued interest, plus the principal, as a lump sum upon redeeming the bond. All savings bonds accrue interest for a set number of years until reaching their maturity date, at which point they no longer accrue interest. An individual may redeem his or her bonds well before that date; however, he or she is typically required to hold each savings bond for a specific period of time and may be required to pay a penalty to redeem a bond before a certain point. Electronic bonds may be redeemed online, while paper bonds may be redeemed by mail or at many financial institutions.

Because they are backed by the federal government, savings bonds are seen as a relatively low-risk investment offering a correspondingly low rate of return. In many cases, the interest offered serves primarily to guard the principal against inflation. Although savings bonds were commonly given as gifts for many decades, they have decreased significantly in popularity during the early twenty-first century. According to a report by CNNMoney, the number of savings bonds issued per year fell from about 40 million to about 400,000 between 2000 and 2013. Experts have attributed this dramatic decrease to both the switch to electronic bonds and the low interest rates offered by modern savings bonds.

Overview

Many different types of savings bonds have been issued over the years, from series A bonds first issued in 1935 to series EE bonds issued in 2024. Series of bonds are frequently discontinued and replaced with new ones, but older bonds can continue to be redeemed long after hitting their maturity dates, and in some cases they continue to accrue interest for decades after being discontinued. As of 2024, several series of bonds continue to be widely redeemed or issued.

Series EE bonds are one of two series of saving bonds that continue to be issued as of 2024. First issued in 1980, EE bonds were for many years a popular gift on occasions such as birthdays and graduations. Their terms and interest rates have changed significantly over the years; for example, EE bonds originally sold for half face value later switched to face value. As such, EE bonds issued in different decades may be quite different despite their shared name. Series EE bonds issued after May 2005 have a fixed rate of interest and accrue compound interest over a thirty-year period. The interest accrues monthly and is compounded, or added to the principal, on a twice-yearly basis. They are available in any denomination between $25 and $10,000, with a maximum purchase of $10,000 per year. New series EE bonds are available only in electronic form, but a number of paper EE bonds continue to accrue interest.

US Treasury regulations require a series EE bond to be held for a year from its purchase date before it can be redeemed. Between one and five years past the purchase date, the bond may legally be cashed in, but the bond holder must forfeit three months of accrued interest as a penalty. Upon redeeming the bond, the bond holder receives a lump sum consisting of the principal and the interest accrued since the bond’s purchase date. The interest is considered taxable income for federal purposes but is not subject to state or local income tax. In some cases, the bond holder may be able to avoid paying income tax on the interest if he or she uses the bond’s proceeds to pay for eligible higher education expenses.

Series HH bonds were introduced in 1980, the successor to the series H bonds that had been issued between 1952 and 1979. These bonds were issued in a select number of even denominations, ranging from $500 and $10,000, and sold for face value. Sold until mid-2004, series HH bonds have a variety of interest rates, depending on when they were issued, and accrue interest for twenty years. Thus, despite having been discontinued, the last HH bonds will continue to accrue interest until 2024. Unlike series EE bonds, series HH bonds pay out interest every six months via direct deposit. That interest is subject to federal income tax for the year in which it was received. The bonds could be redeemed for face value after six months.

Introduced in 1998, series I bonds became the first type of US savings bond to be sold in electronic form in 2002. Although primarily available electronically, they may also be obtained in paper form when issued in lieu of part or all of an individual’s federal tax refund until the start of 2025. Series I bonds are sold for face value in any denomination between $25 and $10,000 and offer an interest rate that combines a varying rate based on inflation with a fixed rate. Much like EE bonds, I bonds accrue interest each month for thirty years and can be redeemed after one year, with a penalty if redeemed before five. Accrued interest is compounded twice per year and is paid, along with the face value, when the bond is redeemed. As with EE bonds, the interest is subject to federal income tax, but an education tax exclusion may apply.

Bibliography

"Brief History of the Savings Bonds Program." US Dept. of the Treasury, 8 Mar. 2011, www.treasurydirect.gov/research-center/history-of-savings-bond/. Accessed 13 Dec. 2024.

Goetzmann, William N., and K. Geert Rouwenhorst, eds. The Origins of Value: The Financial Innovations That Created Modern Capital Markets. New York: Oxford UP, 2005.

Hayes, Adam. “Savings Bond Plan: What Is It, How it Works.” Investopedia, 13 July 2022, www.investopedia.com/terms/s/savings-bond-plan.asp. Accessed 13 Dec. 2024.

"HH/H Savings Bonds." TreasuryDirect, 13 July 2015, www.treasurydirect.gov/savings-bonds/hh-bonds/. Accessed 13 Dec. 2024.

"Series EE and Series E Savings Bonds." TreasuryDirect, treasurydirect.gov/savings-bonds/ee-bonds/. Accessed 13 Dec. 2024.

"Series I Savings Bonds." TreasuryDirect, www.treasurydirect.gov/savings-bonds/i-bonds/. Accessed 13 Dec. 2024.

"Timeline of US Savings Bonds." TreasuryDirect, www.treasurydirect.gov/research-center/history-of-savings-bond/timeline/. Accessed 13 Dec. 2024.