How US Savings Bonds Work: I Bonds vs EE Bonds Explained

What Are US Savings Bonds?

US savings bonds are non-marketable government securities issued directly by the US Treasury. Unlike Treasury bills, notes, and bonds traded on secondary markets, savings bonds are held to maturity or redemption directly with TreasuryDirect — they cannot be sold to another party. They offer a guaranteed, risk-free return backed by the full faith and credit of the US government.

Two types are currently sold: Series I Bonds (inflation-indexed) and Series EE Bonds (fixed rate with a 20-year doubling guarantee). Both are subject to federal income tax but exempt from state and local taxes — a meaningful benefit for taxpayers in high-income-tax states.

Series I Bonds: Inflation Protection

I Bonds earn a composite rate that combines a fixed component (set at purchase, remains for the life of the bond) and an inflation component tied to the Consumer Price Index for Urban Consumers (CPI-U). The composite formula is:

Composite rate = fixed + 2 × inflation + fixed × inflation

The Treasury announces new composite rates every May and November, adjusting only the inflation component. The fixed rate for newly purchased bonds is set at each announcement and stays constant for that bond’s lifetime; the inflation adjustment applies to both old and new bonds.

For bonds issued May–October 2025, the composite rate is approximately 3.98% (fixed 1.20% + inflation component 1.38%). Rates are updated semi-annually at TreasuryDirect.gov.

I Bond Purchase Limits and Rules

• Annual limit: $10,000 per person in electronic bonds via TreasuryDirect, plus up to $5,000 in paper bonds (purchased only with a federal tax refund via Form 8888)
• Minimum hold: 1 year — you cannot redeem an I Bond in the first 12 months after purchase
• Early redemption penalty: If you redeem before 5 years, you forfeit the most recent 3 months of interest
• Maturity: I Bonds earn interest for up to 30 years

Worked Example: I Bond Value After 10 Years

Using the May 2025 composite rate of approximately 3.98% with monthly compounding on a $1,000 purchase held for 10 years (no early redemption penalty — held past 5 years):

• Purchase amount: $1,000
• Hold period: 10 years (120 months)
• Rate used: 3.98% composite (embedded in calculator)
• Projected value: $1,487.35
• Interest earned: $487.35

These numbers were verified using the Savings Bond Calculator above with the same inputs.

Series EE Bonds: Fixed Rate and the 20-Year Guarantee

EE Bonds earn a fixed rate announced each May and November. The current rate for bonds issued May–October 2025 is 2.70% annually. The fixed rate applies for the first 20 years; after 20 years, the Treasury may apply a different rate (currently the same) for the remaining 10 years.

The defining feature of EE Bonds is the 20-year doubling guarantee: the Treasury guarantees that an EE Bond will be worth at least twice its face value if held for exactly 20 years, regardless of the fixed rate. If the compounding formula doesn’t reach 2×, Treasury makes a one-time adjustment at the 20-year anniversary. The effective annual yield for the doubling rule is approximately 3.53% (the 20th root of 2, minus 1).

EE Bonds are most valuable as a long-term “sleep well at night” instrument for 20-year timelines. For shorter holds, the stated fixed rate (2.70%) may trail I Bonds or other savings instruments.

Redemption Rules and the Early Penalty

Both I Bonds and EE Bonds share the same redemption rules:

• Minimum hold: 1 year (cannot redeem in the first 12 months)
• Penalty window: 3-month interest forfeiture if redeemed before 5 full years
• Penalty-free: After 5 years, redeem at full accrued value with no penalty
• Maturity: Both types mature at 30 years (at which point they stop earning interest)

Tax Treatment

The interest on both I and EE Bonds is:

• Subject to federal income tax — but you can choose when to pay it: annually (accrual method) or defer all interest until redemption or maturity (cash method, the default for most holders)
• Exempt from state and local income tax — this can be a significant benefit in high-tax states
• Potentially tax-free for education: Interest used to pay qualified higher-education expenses may be federal-income-tax-free under the Education Tax Exclusion (Form 8815), subject to income limits and other requirements

I Bond vs. EE Bond: Which Is Better?

Use the Savings Bond Calculator to estimate and compare the projected value of both types with your specific hold period and purchase amount.