US Savings Bonds – What Are Savings Bonds and How do They Work?

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Albert Einstein US Savings Bond
When I was a child, my parents and Grandmother bought my siblings and me United States Savings Bonds for our college savings. It was a very generous gesture on their part and I redeemed my US Savings bonds when I went off to college, where they certainly came in useful. When I was younger, I…

When I was a child, my parents and Grandmother bought my siblings and me United States Savings Bonds for our college savings. It was a very generous gesture on their part and I redeemed my US Savings bonds when I went off to college, where they certainly came in useful.

When I was younger, I didn’t understand much about Savings Bonds, only that they were beautiful to look at and were worth a lot of money – or at least they would be worth a lot of money someday! And I think that just about sums up what most people know about US Savings Bonds – they look cool, and one day they will be worth a lot of money (since they are often purchased at less than face value). Hopefully, this primer will give you a better understanding of US Savings Bonds – what they are, and how they work.

For as long as most of us can remember, US Savings Bonds have been a safe place to save and invest money.  There may not be a great deal of growth opportunity in savings bonds or US Treasury Bonds when compared to some other investments, however, there is very little risk involved with these investments. When compared to a traditional savings account, the US savings bond ranks right up there as one of the safest savings tools available.

Savings bonds differ from savings accounts held in financial institutions that are insured by the FDIC in that they are backed by the United States government.  Popular as gifts for children, students and family members it becomes important for recipients to understand how and when to cash in their savings.  Here we look at how you can redeem US savings bonds to collect their cash value.

What Are US Savings Bonds?

United States Savings Bonds are a type of government debt which is issued by the U.S. Department of Treasury through the Bureau of the Public Debt. Essentially, when you buy a Savings Bond, you are loaning the US Treasury some of your hard-earned money, with the promise they will repay it. US Savings Bonds are considered one of the most secure forms of bonds in the world.

The debt financing instruments of the United States Federal government include Treasury Bills, Treasury Notes, Treasury Bonds, and Treasury Inflation Protected Securities, which are all often simply referred to as “treasuries.”

Types of US Savings Bonds

Savings bonds are unmarketable securities which are issued to subscribers and cannot be transferred through market sales. They were originally called Liberty Bonds and used to finance World War I.

There are a couple of different types of United States Savings Bonds available for purchase including Treasury Bonds, I Savings Bonds, and EE/E Savings Bonds.

US Treasury Bonds

Treasury Bonds have a 30-year term and pay a fixed rate of interest on a six-month basis until they mature. The owner of the bond is paid the face value of the bond when it is fully matured. US Treasury bonds may be held until maturity or can be sold prior to the maturity date.  You can purchase treasury bonds from Treasury Direct.  The minimum purchase of a treasury bond is $100, the maximum is $5 million.

I Savings Bonds

I Savings Bonds are a low-risk liquid savings bond that earns interest and protects you from inflation. You can purchase I Savings Bonds from Treasury Direct and at most local financial institutions. The minimum purchase of a paper bond certificate is $50 for a $50 I Bond, and $25 for a $25 I Bond when purchased electronically through Treasury Direct. The maximum purchase for I Savings Bonds in a calendar year is $5,000.

Series EE Bonds

Series EE Bonds are safe, low-risk bonds. They can be purchased from Treasury Direct or almost any other financial institution. Some employers also offer an option of directly purchasing savings bonds through your paycheck.  The current rate through October 31, 2010, is at 1.4% (fixed rate). The minimum purchase for a paper bond certificate is $25 for a $50 EE Bond. The maximum purchase in a calendar year is $5,000 in paper bonds in the purchase price.

US Savings Bonds as Investments or Gifts

Savings bonds may be a good investment if you have the time and patience to let the bonds fully mature. When purchased in advance, they would be great for planning for retirement, saving for education, and giving as gifts for children.

Savings bonds make a great gift for birthdays, weddings, graduations, and celebrating a birth. You can buy a bond for someone in either electronic or paper form. You must be 18 or older to purchase a bond electronically, but do not need to be 18 or older to receive a bond.

To gift a bond, you need to know the recipient’s full name, social security number, and Treasury Direct account number (if purchasing electronically). If purchasing at a financial institution, then you will need to fill out their form and will receive the paper bond usually in about three weeks which can be mailed to you or directly to the recipient of the US Savings Bond.

Ben Franklin Series EE US Savings Bond

US Savings Bonds Alternatives

While US savings bonds are considered some of the safest investments you can buy, the interest rates are currently lower than a high interest savings account.  These two options will get you significantly more interest with only slightly more risk.

WorthyBonds.com

Worthy only lends money out to small businesses and only issues bonds to them if they are secured with liquid assets. So your money is as safe as it can be without being insured or government-backed.

Worthy gives a flat 5% interest rate on its bonds and they are for 36 months (current CD rates for 3 years are 2.8%). However, they do not lock in your money, you can withdraw at any time. You can even get started with as little as $10.

Get started with WorthyBonds>>

Bond ETFs

Exchange traded funds are groups of investments that are traded on the stock market, just like you would a stock from Apple, Netflix, or any publicly traded company.

With a bond focused ETF, instead of investing your money in a single bond, you could invest in a variety of bonds. You can often purchase these types of ETFs on a commission-free basis from many discount brokerage firms, such as E*TRADE, TD Ameritrade, Ally Invest, and others.

How to Cash in US Savings Bonds

How Much Are US Savings Bonds Worth?

There are several ways to determine how much your savings bonds are worth.  US savings bonds can be taken to the bank to determine their current value or you can calculate the value by entering information regarding the savings bond into an online calculator.  Savings bond calculators can be found on several websites with one of the most popular being Treasury Direct which is brought to you by the US Department of Treasury Bureau of Public Debt.

Regardless of which option you choose to determine the value of your savings bonds, you will have to have the actual bonds in hand to get an accurate calculation.  When using the Treasury Direct website, you will be able to save the information in your own “inventory” should you want to revisit this information in the future.

Where Can You Redeem US Savings Bonds?

The first question asked by most savings bond owners is where they can redeem their savings bonds.

Most financial institutions, such as a bank or credit union, can handle the redemption of US savings bonds.  Contact your local bank before taking the bonds in for redemption to ensure they do in fact handle that sort of transaction.

You will be asked to show a valid ID to prove ownership or if the bond is not in your name, proof that you are the rightful heir entitled to the savings bonds. So be sure to ask what documentation is required to confirm identification and ownership of the savings bond.

Electronic bonds which were purchased at TreasuryDirect can be redeemed by logging onto the website and following the on-screen directions.  Once redeemed, you can expect a credit reflecting the amount redeemed in your checking or savings account within one business day.

Special Considerations When Cashing in US Savings Bonds

Savings bonds must be held for at least one year before they can be cashed in.  It is not necessary to wait to redeem a savings bond until it matures. However, redeeming your savings bonds before it is five years old will result in the forfeiture of interest earned in the three month period prior to redemption.  Keep in mind that savings bonds are subject to taxation.  This includes estate, gift, inheritance and federal income tax on interest earned.  Savings bond owners can opt to defer interest reporting until the savings bond is redeemed or report interest annually as it accrues.

Another important factor to consider is the fact that savings bonds are non-transferable.  This results in special considerations for parents redeeming savings bonds owned by minor children or redeeming savings bonds when the owner is incapacitated.

Minor children who are old enough to understand and sign for the redemption can do so if they have identification accepted by the bank.  Savings bonds issued to children who are too young to participate in the redemption process may be cashed in by a parent or legal guardian who signs for the request of payment.

This signature on the back of the bond should certify that the parent is signing on behalf of the minor who is not old enough to understand the request.  Individuals who have Power of Attorney for a friend or relative who is unable to represent themselves can request a special form from the Treasury which addresses the special needs of this situation.

Individuals who inherit savings bonds, manage their children’s savings bonds, or live outside of the United States may be required to take additional steps to redeem savings bonds.  Beneficiaries must present evidence that proves they are the rightful owner of the bond as well as a certified copy of the decedent’s death certificate.  Parents may redeem savings bonds issued to their minor children by requesting such action in writing.  Individuals living outside of the US can visit Treasury Direct for detailed instructions on how to redeem US savings bonds under a variety of circumstances.

For more information regarding US savings bonds and other securities, visit the official website of the U.S. Department of the Treasury Bureau of the Public Debt.

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. syed ahmad says

    A friend of mine in Malaysia have some us treasury bonds which were issued in year 1934 for a maturity period of 33 years @4% intrest per year as I understand they are expired , pl tell me that the bonds are still worth anything thanks

    • Ryan Guina says

      I am not 100% certain, but I would think the bonds are still good, but they probably would have stopped accruing interest by now. Your friend would likely need to take them to a US Bank, or to a bank that will accept US Savings Bonds. Because they are so old, it may be more difficult to find a place to redeem them.

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