U.S. savings bond: a guaranteed return, with real restrictions

A U.S. savings bond is a government-backed savings instrument offering a guaranteed return. Here are the benefits, restrictions, and how to cash one in.

What is a U.S. savings bond?

A U.S. savings bond is a government-backed savings instrument issued by the U.S. Department of the Treasury, offering a guaranteed return in exchange for lending money to the federal government for a set period. Unlike a marketable Treasury security, a savings bond is non-transferable and specifically designed for individual savers rather than active trading.

How U.S. savings bonds work

The two currently available types are Series EE bonds, which earn a fixed rate for up to 30 years, and Series I bonds, which earn a composite rate combining a fixed rate with an inflation-adjusted rate that resets every six months. According to TreasuryDirect⁠(opens in new window), there’s a three-month interest penalty for cashing an EE or I bond within the first five years from its issue date, meaning these are genuinely intended as a longer-term savings vehicle rather than a place for funds that might be needed imminently.

Both bond types can be purchased electronically through a TreasuryDirect account, in amounts as small as 25 dollars, making them one of the more accessible fixed-income investments available to everyday savers. Series I bonds specifically are often highlighted during periods of higher inflation, since their inflation-adjusted component is designed to help savings keep pace with rising prices, a feature not shared by most other simple, government-backed savings products.

U.S. savings bonds: benefits, limitations, and what to watch for

What can work well:

• Government-backed guarantee. Since savings bonds are backed by the full faith and credit of the U.S. government, they’re considered among the safest possible places to hold savings, with essentially no credit risk.

• Inflation protection with Series I bonds specifically. The inflation-adjusted component helps protect purchasing power during periods of rising prices, a feature that distinguishes Series I bonds from many other simple savings products.

• Low minimum investment. Starting with as little as 25 dollars makes savings bonds accessible even for someone just beginning to build savings.

• Tax advantages. Interest is exempt from state and local taxes, and federal tax can be deferred until the bond is cashed or reaches final maturity, and in some cases interest can be excluded entirely from income if used for qualifying education expenses.

What to watch for:

• Limited liquidity in the early years. Beyond the three-month interest penalty for cashing within the first five years, savings bonds generally can’t be cashed at all within the first twelve months after purchase.

• Annual purchase limits. There’s a cap on how much can be purchased electronically per person per year, meaning savings bonds work better as a supplement to other savings vehicles rather than a place for very large sums.

• Lower typical returns compared to riskier investments. The safety of a government guarantee generally comes with a more modest return than a stock-based investment might offer over a long period, though with considerably less risk of loss.

U.S. savings bonds and international considerations

For immigrants building savings in the U.S. while also managing financial ties abroad, understanding the step-by-step process for cashing in a savings bond⁠(opens in new window) is useful both for bonds held directly and for helping an older family member who may hold older, paper savings bonds purchased years or decades earlier and isn’t sure how to redeem them.

Currency risk note

U.S. savings bonds are denominated exclusively in U.S. dollars, meaning their guaranteed return applies specifically in dollar terms. Planning to eventually convert the proceeds of a savings bond into another currency, whether to support family abroad or for another cross-border purpose, means the exchange rate at the time of that conversion affects how much value is actually received in that other currency, entirely separate from the bond’s own guaranteed dollar-denominated return. This means the “guarantee” a savings bond offers is a guarantee in dollars specifically, not a guarantee of a fixed amount of purchasing power in any other currency that might eventually be needed.

Deciding whether a savings bond fits your savings goals

1. Confirm the timeline allows for limited access in the early years. Since bonds can’t be cashed for at least a year, and carry a penalty within the first five years, they’re best suited for money not needed imminently.

2. Consider a Series I bond specifically if inflation protection matters to specific goals. Its inflation-adjusted component is a distinguishing feature worth weighing against a Series EE bond’s simpler fixed rate.

3. Check the current annual purchase limit. This cap means savings bonds typically work best as one part of a broader savings approach rather than the sole destination for significant savings.

4. Think through any plan to eventually convert proceeds to another currency. As covered above, this introduces a variable the bond’s own dollar-denominated guarantee doesn’t address.

Gifting savings bonds and using them for education

Savings bonds are sometimes purchased as a gift, particularly for a child, since the low minimum investment and long-term nature make them a traditional choice for this purpose, though the gifting and registration rules involve some specific steps worth understanding before assuming the process works exactly like transferring cash. Additionally, interest from Series EE and Series I bonds can, under certain conditions, be excluded entirely from federal income tax if the proceeds are used to pay for qualifying higher education expenses, a benefit sometimes called the Education Savings Bond Program. This exclusion comes with its own specific income limits and requirements, meaning it doesn’t apply automatically to every bondholder, and checking the current rules directly with the IRS or TreasuryDirect before assuming eligibility protects against an unexpected tax bill if the exclusion doesn’t apply to the specific situation.

In Summary

A U.S. savings bond offers a genuinely low-risk, government-backed way to grow savings over time, with Series I bonds specifically offering some protection against inflation, though the limited early liquidity and dollar-only denomination are real tradeoffs worth understanding clearly. For anyone planning to eventually convert bond proceeds into another currency, factoring in currency risk alongside the bond’s own guarantee gives a more complete, honest picture.

This publication is provided for general information purposes only and is not intended to cover all aspects of the topics discussed herein. This publication is not a substitute for seeking advice from an applicable specialist or professional. The content in this publication does not constitute legal, tax, or other professional advice from Remitly or any of its affiliates and should not be relied upon as such. While we strive to keep our posts up to date and accurate, we cannot represent, warrant, or otherwise guarantee that the content is accurate, complete, or up to date.