How Savings Bond Plan Works, Pros & Cons

Tolu Gabriel
Tolu Gabriel March 14, 2022
Updated 2022/03/15 at 11:27 AM
How Savings Bond Plan Works, Pros & Cons

The Savings Bond Plan makes it convenient and easy to automatically purchase U.S. savings bonds through payroll deductions or direct withdrawals from a checking or savings account. Add to your current holdings, or start an account for someone special.

With the Savings Bond Plan, you can easily purchase U.S. savings bonds through automatic withdrawals from your checking account or automatic payroll deductions — making it a great way to start a new account for your child or add to an existing account.

Savings bond plan investment comes in highly low risk. If you want to step up your savings, you can contribute to a savings bond plan. There are a few things to know about the savings bond plan and how to get involved in one if you qualify.


What is a Savings Bond Plan?

A savings bond plan is a system that permits you to use part of your paycheck to acquire savings bonds automatically. Similar to a direct deposit, just that your money will be sent to a TreasuryDirect account instead of a bank account.

There are two types of savings bonds that you can consider investing in. Both savings bonds types are traded at face value with an accrued monthly interest. Interest compounds semi-annually till the bond attains a three-decade full maturity date or cash them at other times. When you get your savings, you’ll receive the accrued interest when you finally redeem your bond.

The two types of savings bonds plans can be cashed out after a 12 months period. However, you’ll be at risk of forfeiting three months of interest, if you cash out within the first five years.

For instance, if you earn a savings bond after 48 months, you’ll only receive interest that’s worth for 45 months.


How a Savings Bond Plan Works

To apply for a savings bond plan, you must first create a TreasuryDirect account.

After creating the account, then create a payroll savings plan. While doing this, you’ll be required to decide on the type of savings bond you invest in, and the projected dollar amount. 

Thereafter, set up a transfer. It is done in the same pattern as an automatic direct deposit, by inputting “TreasuryDirect” as the recipient, with the routing numbers and account information provided.

Your deposit is harnessed in acquiring non-interest-accruing security called a “Payroll Certificate of Indebtedness,” or Payroll C of I, which would be used to fund your savings bond purchases. 

After having sufficient funds accumulated to acquire savings bonds in your Payroll C of I, your purchase will be automated on the TreasuryDirect system. So, if you are considering purchasing $25 I bonds and contributing $12.50 per paycheck every proceeding week, TreasuryDirect will purchase one $25 bond for you automatically with your Payroll C of I after doing your first two paychecks.

Then, after every four weeks, another $25 bond will be done. You acquire as much as $10,000 per calendar year of both Series EE and Series I, or an annual $20,000 amount.

With a TreasuryDirect account, you can use payroll direct deposit to purchase up to $10,000 per month per employee in U.S. savings bonds.

Saving with the help of a smart plan is the first step to building financial security. With payroll savings plans you can use recurring payroll deductions to have your money transferred automatically to several different savings vehicles, such as TreasuryDirect, Thrift Savings Plans, and Individual Retirement Accounts (IRAs).


Pros and Cons of a Savings Bond Plan


  • Savings are automated


  • Investing is safer


  • Offers Tax benefits



  • A safe investment, but extremely low interest


  • Opportunity risk


  • The early withdrawal comes with a penalty


Pros Explained

  1. Savings are automated: Savings Bond Plan will help you automate savings and investments. Your considered amount will be deposited in your TreasuryDirect account.
  1. Investing is safer: Investing in savings bonds is a safe way to invest because it is backed by the credit and full faith of the U.S. government.
  2. Offers Tax benefits: Savings Bond Plans come with multiple tax benefits. For instance, you’ll not have to pay local or state income taxes over accrued interests. Federal taxes on the interest are deferred till your savings bonds are redeemed.

In some situations, Federal income taxes are not included in the savings bond interest. For instance, when the savings bond is used for qualifying education expenses.


Cons Explained

  1. Safe investment, but extremely low interest: Since savings bonds come with very low risk, it doesn’t come with much interest. For instance, Series EE Bonds issued between May 2021 and October 2021 earned an annual fixed rate of 0.1%. Series I bonds issued for the same period earned 3.54%, all of which is attributed to the semiannual inflation adjustment.
  1. Opportunity risk: As a result of their low-interest rates, savings bonds are accompanied by opportunity risk — the risk of losing out on opportunities for better investments.
  1. Early withdrawal comes with a penalty: Anytime after 12 months, you can cash out your savings bond investment. However, you’ll lose interest for three months to be able to redeem your savings bond — if it’s below five years.



Whether you choose to buy U.S. savings bonds or other types of bonds—or give them as gifts—they’re a good option for adding a safe, dependable investment to your portfolio. 

US Savings Bonds are a low-risk alternative that pays interest at various rates, depending on the type of bond, until they reach maturity. The most common type which is EE bonds, pay 60% of the average yield on 5-year Treasury securities.

With a savings bond plan, you can build a nest egg for your future with minimal effort. 

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