U.S. Savings Bonds vs. CDs: What’s the Difference? (2024)

U.S. savings bonds and certificates of deposit (CDs) are both savings vehicles that offer a modest profit for a high degree of safety. In both cases, the investor is lending some cash in return for the payment of a set amount of interest. Both are easy, convenient ways to invest without going through a broker. Your savings will be safe and earn interest.

There are differences, though, and the biggest comes down to time. U.S. savings bonds are designed to be a long-term investment, while CDs can be found with maturities as short as one month.

Key Takeaways

If you’re investing for the long term, a U.S. savings bond is a good choice.
The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases.
If you’re saving for the short term, a CD offers greater flexibility than a savings bond.

U.S. Savings Bonds

A U.S. savings bond is guaranteed to double in value over 20 years, and it can keep earning interest if held for up to 30 years. That’s why the savings bond is a traditional gift for newborn babies.

A savings bond cannot be cashed in during the first year, and a penalty of three months’ interest is imposed for cashing it in before five years have passed. After that, the owner of the bond will get back the purchase price in full and forgo future interest payments.

There are two main varieties of U.S. government savings bonds:

The Series EE savings bond pays a fixed interest that is guaranteed to double the value of the bond over 20 years. The rate is fixed when the bond is purchased, and tax is deferred until the bond is cashed. The interest rate on EE bonds through April 2024 is fixed at 2.70%.
The Series I savings bond has both a fixed and a variable interest rate. The fixed rate is set when the bond is purchased, and the variable rate is adjusted every six months based on consumer price inflation. That can prevent a case of investor’s remorse if interest rates soar during the bond’s life. The interest rate on I bonds through April 2024 is fixed at 5.27%.

Certificates of Deposit (CDs)

Certificates of deposit (CDs) are issued by banks and are a form of savings account. They pay a little more interest than a regular savings account. A CD can be bought for a term as short as one month and as long as 10 years. The shorter the term, the lower the interest rate.

The interest rates offered at any given time are tied to the current prime rate. Thus, if you’re CD shopping at a time of low rates and rock-bottom inflation, it makes sense to avoid tying up your money for a long period. If it looks like interest rates will rise soon, you can buy a one-, three-, or six-month CD and shop around for a better deal when it matures.

Some investors use a strategy called laddering to invest in CDs. They buy a new CD every month or every three months regardless of the interest rates offered. That gives them exposure to the highest rates available at any given time while ensuring that some cash is readily available as an older CD matures.

Of the two investment options, CDs are the more flexible. You don’t have to commit to a long-term investment or tie up your money for an extended period. However, should you need to redeem the CD early, you will be assessed a penalty. It’s also not a good idea to keep your emergency fund in a CD because early withdrawal penalties can eat up several months of interest and even a small amount of principal.

It pays to shop around for a CD, as each bank sets its rates based on the current prime rate.

Should I Keep My Emergency Savings in a Bond or a Certificate of Deposit (CD)?

You can store your emergency fund in a bond or a certificate of deposit (CD). However, should you need to withdraw your money immediately if a financial emergency arises, you will incur a penalty fee if the CD or bond has not reached maturity. So, it can be more prudent to keep emergency funds in a more liquid account like a high-yield money market savings account.

Is It Better to Invest in CDs or Bonds?

Both CDs and U.S. savings bonds have various maturities and interest rates and offer the lowest investment risk for investors. CDs feature Federal Deposit Insurance Corp. (FDIC) protection up to $250,000 per account. U.S. savings bonds are backed by the full faith and credit of the United States and do not limit the coverage amount.

How Do I Buy a Savings Bond?

To buy an EE savings bond, you’ll have to do so online at TreasuryDirect. Once you make an account, you’ll be able to purchase the bond. You can also buy paper Series I bonds using your federal tax return.

The Bottom Line

Both savings bonds and CDs are considered extremely safe investments. U.S. savings bonds have a AAA rating and are “backed by the full faith and credit of the U.S. government.” CDs up to $250,000 are fully insured by the Federal Deposit Insurance Corp. (FDIC).

Income earned from CDs is taxable at both the state and federal level. Also, these earnings are taxed as interest income rather than as capital gains, which carries a lower rate. You should receive a 1099-INT form from the financial institution that holds the CD. When your earnings span several tax years, you will pay tax only on the portion that was earned in that taxing year. Should you hold the CD in a tax-advantaged retirement account, such as a 401(k) or an individual retirement account (IRA), these taxes can be deferred.

Any interest earned from a saving bond is taxable. You will need to report this interest income on your annual federal tax filing. However, there are no state and local taxes assessed.

Also, Series EE and Series I bonds may qualify for education tax exclusion if you use them to pay for qualified higher education expenses and you are a qualified taxpayer. These funds may help you offset the cost of tuition and other fees.

FAQs

U.S. Savings Bonds vs. CDs: What’s the Difference? ›

Bonds vs. CDs. Here's the main difference between a bond and a CD: A bond is an investment that earns a fixed interest rate for loaning money to a company or government, while a CD is a deposit account at a financial institution that earns a fixed interest rate.

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What's the difference between savings bonds and CDs? ›

Interest Rates and Returns: Bonds often have higher interest rates than CDs. Liquidity and Access to Funds: CDs typically incur penalties for early withdrawals, while bonds can be sold before maturity without penalty; however, you may incur a loss if the price of the bond is below the purchase price.

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Why would a person choose a government bond over a CD? ›

Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk. When interest rates are high, a CD may yield a better return than a bond. When interest rates are low, a bond may be the higher-paying investment.

Is it better to buy Treasury bonds or CDs? ›

While Treasurys boast higher rates than CDs, you can still score a generous annual percentage yield (APY) on a CD by shopping around. Typically, online banks offer higher interest rates than brick-and-mortar ones. Some of the best CDs have APYs that top 5%.

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What are two main differences between CDs and a savings account? ›

A certificate of deposit (CD) account is an alternative to a traditional savings account. A CD account typically requires a higher balance than savings accounts, and your funds will usually remain on deposit for a fixed period of time (the “term” of the account).

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Are CDs safe if the government defaults? ›

In most cases yes, up to a point. CDs are typically insured up to the FDIC limit, though it is possible to buy jumbo CDs above that level. But you could also invest in a US Treasury money market fund, and Treasuries are backed by the full faith and credit of the US government without limits.

Why buy treasury bills instead of CDs? ›

If you're saving for a goal less than a year away: If you're saving money for a goal with a short-time horizon, T-bills can make more sense than CDs. They provide a higher APY than savings accounts, and they're more liquid than CDs.