I Bonds: What They Are and How to Buy

In a high-inflation environment, I bonds are increasingly attractive. They're currently paying interest rates of nearly 7%. Should you invest?
Alana Benson
By Alana Benson 
Edited by Arielle O'Shea Reviewed by Raquel Tennant

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Nerdy takeaways
  • I bonds have a 6.89% interest rate until April 2023.

  • The interest rate will likely change in six months.

  • If rates stay the same you could earn about $701 in interest in one year. See how we got this number below.

What are I bonds?

I bonds, also known as Series I savings bonds, are a type of bond that earns interest from a variable semiannual inflation rate based on changes in the Consumer Price Index for All Urban Consumers, or CPI-U.

An I bond's rate combines two different rates: a fixed rate and an inflation rate. The fixed interest rate remains the same throughout the bond's life. Its inflation rate is announced by the Bureau of the Fiscal Service and can change twice a year, in May and November.

» Learn more: What causes inflation?

The combination of an I bond's fixed rate and inflation rate creates its composite rate. This is the interest rate an I bond will actually earn. Currently, I bonds are offering a composite rate of 6.89% until April 30, 2023.

TreasuryDirect. Series I Savings Bonds. Accessed Aug 23, 2022.

As its name suggests, an I bond's inflation rate is heavily impacted by inflation. As inflation changes, the inflation rate adjusts to offset those changes. This can help protect your money's purchasing power.

You're also required to hold your bond for at least a year before you can cash it in, and there are interest rate penalties for cashing in before five years.

» Learn more: What is a bond?

Are I bonds a good investment?

Whether I bonds are a good choice for you depends on your financial goals and timeline. I bonds can be a safe immediate-term savings vehicle, especially in inflationary times.

I bonds offer benefits such as the security of being backed by the full faith and credit of the U.S. government, state and local tax-exemptions and federal tax exemptions when used to fund educational expenses. Remember, though, there are penalties for withdrawing the money too soon, and interest rates are adjusted every six months.

Because I bonds are held for a year or longer, they should be invested in after you have an adequate emergency fund.

» Curious? Learn about financial priorities

How much can you make with I bonds?

I bonds are complicated, and even though you earn a guaranteed rate for six months at a time, there's still quite a bit of calculating to arrive at your guaranteed return.

Say you bought $10,000 worth of electronic I bonds in November 2022 (the maximum amount of electronic I bonds you can buy in one year). Your fixed rate would be 0.40%, and your inflation rate would be 3.24%. Your composite rate of 6.89% is calculated as follows:

[Fixed rate + (2x inflation rate) + (fixed rate x inflation rate)] = composite rate

Or, in real numbers:

[0.0040 + (2 x 0.0324) + (0.0040 x 0.0324)] = 0.0689

TreasuryDirect. I bonds interest rates. Accessed Nov 2, 2022.

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This composite rate of 6.89%, applied to $10,000 in I bonds, would earn a guaranteed $344.50 in interest over the next six months (not $689, that's because it's an annualized rate) — but you cannot cash in your bond until you've held it for a year. So why even mention the six-month take? Because your rate is only guaranteed for six months. After that, the rate can go up or down.

But let's pretend the interest rate of 6.89% remains the same for the second six-month period. Add the first six months of interest ($344.50) to your original investment of $10,000 as your new principal. You'll earn the 6.89% interest rate on that new number, $10,344.50, for the next six months. That will result in an additional $356.50 in interest for your second six-month period, and a total of about $701 in interest total for a one-year period.

At this point, you'd be able to exit the bond agreement. The problem is that if you cash in your bond before you've held it for five years, you lose the last three months of interest you earned. For this example that would be about $178, meaning if rates remain the same and you want to get your money out after one year you'd net about $523 in interest. If you kept your money in the bond for five years you could keep the total minus any tax owed.

If rates remain the same and you want to get your money out after one year you'd net about $523 in interest.

But bonds are meant to be held long-term, and rates probably will change over time. If you kept your $10,000 bond for 30 years, you wouldn't lose any interest to penalties, but there is no guarantee your rate would stay the same. This can make it difficult to know exactly how much you can make investing in I bonds over a long period — though that is true for most investments.

I bonds and taxes

How I bonds are taxed

Like other investments, the interest you earn from I bonds is subject to taxes. These taxes include (but not state or local income tax) and any federal estate, gift, and excise taxes plus any state estate or inheritance taxes.

When it comes to reporting your interest you do have two options:

  • You can put off reporting the interest until the year you actually get the interest.

  • You can report the interest every year even though you're not receiving the interest at that point.

I bond tax benefits

An education tax exclusion can help you exclude all or part of your I bond interest from your gross income if you meet several conditions:

  • You cash your I bonds the same tax year you claim the exclusion.

  • You paid for qualified higher education expenses that same tax year for yourself, your spouse, or your dependents.

  • Your filing status is not married filing separately.

  • Your modified adjusted gross income was less than $98,200 if single or $154,800 if married filing jointly.

  • You were 24 or older before your savings bonds were issued.

» Learn about how to invest in bonds

I bonds for retirees

If you're heading into retirement, and are worried about the effects of high inflation, I bonds could be something to consider. It's generally a good idea to shift your investment portfolio toward less risky investments as you get closer to retirement; You don't want to risk your hard-earned money when you're close to needing it. Since I bonds are backed by the U.S. government they carry very little risk. Plus, you'll have the added bonus of protecting your cash's purchasing power.

If you're thinking of investing in I bonds for retirement, you'll want to be sure to add a beneficiary designation. This will make it easier for your loved ones to possess your I bonds in case you pass away. If you don't select a beneficiary those I bonds may have to go through probate court before your heirs can get access to them.

If you're considering how I bonds could impact your retirement funds it may be wise to speak with a financial advisor.

Should you buy I bonds?

I bonds have been getting more press than usual lately, but does that mean they're worth it?

"I bonds are a good place to park some cash that you will need in the intermediate term (one to five years). For example, placing cash in I bonds that you will use for a down payment in a couple of years makes a lot of sense," said Kenneth Chavis, a certified financial planner and senior wealth manager at LourdMurray in Los Angeles, in an email interview.

If you're investing for a long time frame — for example, for retirement — you might want most of your portfolio allocated toward stocks instead. You can think of dipping stock markets as a sale. Keeping money invested in a volatile market is generally a sound strategy — historically speaking, odds are good that your investments will rebound.

What’s more, I bonds may not be as convenient to buy and manage as other securities. While many investors turn to bond exchange-traded funds (ETFs) for quick and easy diversification, I bonds are only bought and sold through the U.S. government via TreasuryDirect, not on secondary markets through brokers.

» Learn more about Bond ETFs

How to buy I bonds

Here's how to buy Series I bonds:

1. Pick which types of I bonds you want to buy

There are two types of I bonds, paper and electronic.

Paper I bonds can only be purchased by mail when filing a federal income tax return. This alone can make it difficult to purchase them.

Electronic I bonds can be purchased online by creating an account on the TreasuryDirect website.

TreasuryDirect. TreasuryDirect accounts. Accessed Aug 23, 2022.

2. Decide how much you want to invest in I bonds

Paper I bonds have a minimum purchase amount of $50 and a maximum of $5,000 per calendar year. You can buy them in increments of $50, $100, $200, $500 and $1,000. Electronic I bonds have a minimum purchase amount of $25 and a maximum of $10,000 each calendar year. You can buy them in any amount up to $10,000.

If you buy the maximum amount of paper and electronic I bonds, you can buy up to $15,000 worth of I bonds each year.

3. Figure out how long to keep your I bonds

"Most bondholders hold the bond for at least 12 months. If they sell the bond before the 12 months, they receive no interest," Kendall said. "If they sell a bond after holding it for less than five years, they lose three months of interest on the bond."

If you hold the bond for five years or more, you won't lose any interest. I bonds can earn interest for 30 years unless you cash them out before then.

» Read more about how to buy bonds

Neither the author nor editor held positions in the aforementioned investments at the time of publication.
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