Are U.S. Savings Bonds a Good Investment During Inflation?

U.S. savings bonds are ultra-safe offer tax advantages, especially when used for eligible education costs. However, other investments such as stocks and mutual funds typically produce higher rates of return, and the government also limits the amount of savings bonds investors can purchase every year. As a result, for most investors savings bonds are no more than a small part of a diversified investment portfolio. A qualified financial advisor can help you determine how savings bonds can fit into your investment strategy.

Savings Bond Basics

Savings bonds are fixed-income securities guaranteed by the U.S. government, making them some of the lowest-risk investments available. Many different series of savings bonds have been issued by the Treasury Department starting in 1935 and they have offered a range of interest rates, maturities and other features.

The only two series issued today are Series EE and Series I bonds. These are 30-year bonds sold at full face value. This means the bonds pay interest for 30 years and a $50 bond costs $50 to purchase.

The bonds are also zero-coupon, meaning the buyer does not receive periodic interest payments. Instead, interest is added to the principal and compounded, so that the interest then earns interest. The   only way to recoup the principal and receive the interest is to cash the bonds.

Buyers may not cash the bonds for the first year and, if they cash the bonds before five years since purchase, they forfeit the last three months of interest. After five years, there is no penalty to cash the bond. The bonds stop paying interest after 30 years.

Savings bonds can only be purchased online directly from the U.S. Treasury. It’s not necessary to have a brokerage account. Individuals as well as trusts, corporations, partnerships and other entities can open an account at TreasuryDirect.gov and buy or redeem savings bonds any time day or night.

Series I Savings Bonds

Series I bonds pay an interest rate based on inflation. The rate is changed twice a year, in April and October. In April 2022, the rate was set at 9.62% annually, reflecting the then-current rate of inflation. I bonds bought before the end of October 2022 pay that rate for the first six months after purchase. After that, the rate will be adjusted for the next six months based on whatever inflation was at the prior reading.

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Series I bonds can be purchased online in penny increments starting at $25. Each taxpayer can purchase only up to $10,000 in I bonds per year. However, by using a tax refund, a taxpayer can purchase another $5,000 in I bonds each year. Tax refunds can also be used to purchase paper I bonds.

Series EE Savings Bonds

Series EE bonds pay a rate that is fixed when issued and stays the same for the entire 30 years. The rate is typically similar to what is available from a bank savings account and, as of May 2022, was set a 0.1%.

Unlike deposits to bank savings accounts, however, Series EE bonds guaranteed to double in value after 20 years. If the accumulated interest is less than twice the bond’s face value, the Treasury makes up the difference. This is equivalent to an interest rate of approximately 3.5%, but it’s only available if the bond is held for 20 years.

Series EE bonds can only be purchased electronically through Treasury Direct. There are no paper Series EE bonds since 2012. Buyers are limited to $10,000 in Series EE bond purchases each year.

Savings Bond Pros

Security is the key feature of savings bonds. These investments are considered risk-free since they are backed by the full faith and credit of the U.S. government.

Simplicity is another major appeal. Savings bonds are easy to buy without a brokerage account using the TreasuryDirect site. Electronic bonds can be purchased in penny increments from $25 to $1,000. The small initial minimum investment of just $25 is another benefit.

They are also easy to cash in. Using the TreasuryDirect website, savings bond redeemers can have the proceeds deposited directly to their checking accounts.

Inflation protection is another important benefit of Series I bonds. Investors can be sure money used to buy Series I bonds will not lose purchasing power no matter how much inflation rises.

Tax advantages also come with savings bonds. The interest is free from state and local taxes, although estate and inheritance taxes may apply. Federal income tax is due on interest, but if used for eligible education purposes the federal income tax too may be evaded.

Savings Bond Cons

Money used to buy a savings bond is locked up for at least a year. For more years, the saver has to forfeit three months of interest as an early withdrawal penalty.

The purchase limit is another downside of savings bonds. For investors with large portfolios, the $10,000 cap on purchases makes savings bonds at most a small part of their investment strategy. There is no secondary market for buying and selling savings bonds, so the Treasury purchase limit can’t be avoided.

The low interest paid by EE bonds is another downside. At a yield of 0.1%, money put into Series EE savings bonds will fail to keep pace with even very low inflation and fall far behind many other investments.

Bottom Line

Savings bonds are very low-risk investments and are easy to make even for people with only small amounts to invest. Series I bonds can offer valuable inflation protection, and both Series I and Series EE bonds are free of state and local income taxes and, if used for eligible education expenses, federal income taxes as well. However, purchase limits and the low Series EE interest rates make these at most a part of a diversified portfolio of investments.

Tips for Investing

• A qualified financial advisor can discuss how and whether savings bonds fit into your financial strategy and finding the right one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Use SmartAsset’s free online investment calculator to find out how your investment will grow over time. Start with the initial amount, set additional periodic contributions, rate of return and years of growth, and see what the balance will be at any year in the future.

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