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

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 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 will earn interest.

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

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 are up. After that, the owner of the bond will get back the purchase price in full and forego 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 a 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 30, 2019, was fixed at 0.10%.
• 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 30, 2019, was fixed at 2.83%.

Certificates of deposit (CDs) are issued by banks and are a form of savings account. They pay a little more than a regular savings account. A CD can be bought for a term as short as three months 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. So, 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, buy a three-month or six-month CD and shop around for a better deal when it matures.

It's not a good idea to keep your emergency stash in a CD. Early withdrawal penalties can eat up several months of interest and even a small amount of principal.

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." Certificates of deposit up to $250,000 are fully insured by the Federal Deposit Insurance Corporation (FDIC).

CDs are more flexible of the two investment options. You don't have to commit to a long-term investment or tie up your money for an extended period. However, if you should need to redeem the CD early, you will be assessed a penalty.

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.