What Is a Savings Bond Plan?

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Definition

A savings bond plan allows you to have part of your paycheck deposited in a TreasuryDirect account to automatically buy Treasury-backed debt securities (U.S. savings bonds) on a regular basis.

Key Takeaways

  • A savings bond plan allows you to automatically buy U.S. savings bonds using payroll deposits.
  • To enroll in a savings bond plan, you’ll need to set up a TreasuryDirect account.
  • You can buy Series EE bonds or Series I bonds with your savings bond plan.
  • Savings bonds are seen as lower-risk investments, but that also means you won’t earn as much as with other investment types.

How a Savings Bond Plan Works

A savings bond plan funnels money directly from your paycheck into an account that's used to buy U.S. debt securities (savings bonds) whenever there's enough money in the account. It works the same way as a direct deposit, only instead of having your money automatically sent to a bank account, it goes to a TreasuryDirect account. TreasuryDirect is the website that allows investors to buy U.S government securities.

Note

Alternate name: TreasuryDirect Payroll Savings


You can invest in two types of savings bonds with a savings bond plan:

  1. Series EE bonds: EE bonds earn interest for 30 years and are guaranteed by the government to double in value in 20 years. For the first 20 years, the bonds earn a fixed interest rate, which may be adjusted after that.
  2. Series I bonds: I bonds offer a fixed interest rate, plus a semiannual inflation adjustment. The Treasury guarantees the interest rate will never fall below zero. I bonds may be particularly attractive when inflation rates are high.

Both types of savings bonds are sold at face value and accrue interest monthly. Interest compounds semi-annually until the bonds reach their 30-year maturity date or you cash them out—whichever happens first. You receive the interest that accrued when you redeem the bond.

You can cash out both types of savings bonds after 12 months, but if you do so within the first five years, you’ll forfeit three months of interest. For example, if you cash out savings bonds after 24 months, you’ll only get 21 months’ worth of interest.

Note

Treasury bonds are also sold by the Treasury, but they are not savings bonds. Savings bonds can only be bought through the government, up to a maximum of $10,000 a year. Treasuries are sold by the government at auction, but can be sold by a broker or on secondary markets. You can invest up to $10 million in Treasury bonds.

How To Enroll in a Savings Bond Plan

To enroll in a savings bond plan, you need to set up a TreasuryDirect account. Once you’ve created the account, you can set up a payroll savings plan. You’ll choose the type of savings bond you want to invest in and the dollar amount you want to buy.

You then ask your employer to make periodic transfers from your paycheck through direct deposit. You'll enter "TREASURYDIRECT" as the receiving bank’s name and provide the appropriate account and routing numbers for your TreasuryDirect account.

The money you deposit is used to buy a non-interest-accruing security called a "Payroll Certificate of Indebtedness" (C of I) that will fund your savings bond purchases. Once you’ve accumulated enough money in your C of I to buy a savings bond, the TreasuryDirect system will automatically make the purchase for you.

For example, if you wanted to buy $25 I bonds and contribute $12.50 per paycheck every other week, TreasuryDirect would automatically buy you one $25 bond using your C of I after your first two paychecks, and then another $25 bond every four weeks after that.

You can purchase up to $10,000 per calendar year of Series I and Series EE bonds each, or a total of $20,000 annually.

Pros and Cons of a Savings Bond Plan

Pros
  • Automatic savings

  • Tax advantages

  • Safer than other types of investments

Cons
  • Opportunity risk

  • Low returns relative to some other investments

  • Penalty for early redemption 

Pros Explained

  • Automatic savings: Setting up a savings bond plan is a good way to save and invest money automatically. You don't have to think about buying bonds on a regular basis or saving up until you have enough for a large bond. Once you set the plan up, you can forget it.
  • Tax advantages: Using a savings bond plan comes with several tax advantages. You won’t pay state or local income taxes on the interest you earn, and federal taxes on the interest are deferred until you redeem the savings bonds. Under some circumstances, savings bond interest is exempt from federal income taxes when it’s used for qualifying education expenses.
  • Safer than other types of investments: Savings bonds are considered very safe investments because they’re backed by the full faith and credit of the U.S. government and you won't lose money, as you could with stocks.

Cons Explained

  • Opportunity risk: Because they earn relatively low interest yields, savings bonds carry opportunity risk, which is the risk of missing out on a better investment opportunity.
  • Penalty for early redemption: Although you can cash out the money you invest in a savings bond plan after 12 months, you’ll give up three months’ worth of interest if you redeem your savings bonds before five years.
  • Low returns relative to some other investments: Because savings bonds are so low risk, you will often earn less than you would through stocks or corporate bonds. One exception is when inflation is very high; in that situation, I bonds may earn more than other types of investments.

Frequently Asked Questions

How does a savings bond work?

A savings bond is a way for investors to lend money to the U.S. government. You buy a U.S. savings bond from the government's TreasuryDirect website in increments ranging from $25 to $10,000. The two types of bonds are EE bonds and I bonds. Both pay interest at regular intervals and mature in 30 years. U.S. savings bonds are considered very safe because they're backed by the U.S. government. But because they're low risk, their returns are often lower than what you could get from other types of securities, such as stocks.

How do you cash a savings bond?

You can cash in a savings bond at any time after you've held it for 12 months, but if it's before five years, you'll forfeit the last three months' of interest. To cash an electronic EE or I bond, go to your TreasuryDirect account, then to ManageDirect and click the link for cashing securities. You can cash all or part of an electronic bond.

If you want to cash a paper bond, you must cash the whole thing. Some banks will cash paper bonds, or you go directly through the Treasury and follow the directions on Form 1522.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. TreasuryDirect. "Buying Savings Bonds."

  2. TreasuryDirect. "Series EE Savings Bonds."

  3. TreasuryDirect. "I bonds."

  4. TreasuryDirect. "Comparing Series EE and Series I Savings Bonds."

  5. TreasuryDirect. "Treasury Bonds."

  6. Investor.gov. "Savings Bonds."

  7. IRS.gov. "Using Your Income Tax Refund to Save by Buying U.S. Savings Bonds."

  8. TreasuryDirect. "Cash EE or I Savings Bonds."

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