The Difference Between a Savings Bond & Certificate of Deposit

If you are looking for safe investments that pay returns that are a bit better than savings or money market accounts, savings bonds and certificates of deposit fit the bill. Both offer modest earnings, but come with restrictions and penalties if you cash them in early. Despite their similarities, savings bonds and CDs are very different investment animals. Knowing the difference between a savings bond and certificate of deposit will help you decide which species belongs in your investment portfolio.


Savings bonds are sold by the U.S. Bureau of the Public Debt through in two forms: Series EE and Series I savings bonds. As of 2012, savings bonds are no longer sold in paper form, although owners of paper savings bonds may hold them until they mature. Because savings bonds are backed by the federal government, they carry virtually no default risk. That means you can be sure of getting your money back. Certificates of deposit are sold by banks and thrift institutions. CDs are insured by the Federal Deposit Insurance Corporation up to a maximum of $250,000.


Savings bonds typically have an investment period, or maturity, of 30 years. CDs have maturities ranging from a few months to 5 years and longer. sells savings bonds starting at $25, but limits investors to a yearly maximum of $5,000 each of Series EE and Series I bonds. Banks do not set upper limits to the amount you can invest in CDs. Minimum investments can be $1,000 or more. Both CDs and savings bonds have penalties if you cash them in early, but the terms are different. You may not cash in a savings bond for at least one year after you purchase it and you forfeit three month’s interest if you redeem a bond in less than five years. CDs typically impose a penalty of several months’ interest when you withdraw the funds anytime prior to the maturity date.


Most CDs pay a fixed-interest rate guaranteed until the maturity date. Some CDs pay out interest as it is earned, typically every three months. The interest on other CDs accrues, meaning it is added to the balance of the CD as it is earned. The entire amount is paid to you when the CD matures. All savings bonds accrue interest in this manner. Series EE bonds pay a fixed interest rate. Series I bonds combine a fixed interest rate with a variable rate that is tied to the rate of inflation and thus is variable.

Tax Consequences

The interest income for both CDs and savings bonds is taxable at regular income tax rates, unless the bond or CD is in a tax-deferred or tax-free account such as an IRA. However, the tax consequences are different. The interest earned by a CD is taxable in the year the interest is earned. Savings bond interest is not taxable until you cash in the bond. Also, savings bond interest is exempt from all state and local income taxes.

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