I Bonds: What They Are and How to Buy
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I bonds are a type of savings bond that are designed to protect your investment from inflation.
Some people opt to use their tax refund to purchase I bonds.
I bonds have a 4.30% interest rate until October 31, 2023.
If rates stay the same you could earn over $434 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 4.30% until October 31, 2023.
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?
I bonds vs. EE bonds
You may have confused I bonds with their cousin EE bonds. Here’s how to keep them straight.
The U.S. Treasury issues two types of savings bonds: I bonds and EE bonds. The minimum purchase for either bond is $25. Both I and EE bonds earn monthly interest that compounds semi-annually for up to 30 years. They can be sold starting 12 months after purchase and ultimately mature after 20 years. However, if sold prior to the five year mark, I and EE lose three months’ worth of interest.
The main difference between I and EE bonds is their interest rate. Unlike the I bond rate, which adjusts with the Consumer Price Index to protect you from inflation, EE bonds offer a fixed rate of interest that promises to double the value of the bond if held for 20 years.
Ultimately, whether you’d prefer to invest in an I or EE savings bond comes down to your beliefs about how inflation and interest rates will move in the future. Here’s a summary of the similarities and differences.
Interest rate calculation
Adjusts with the Consumer Price Index.
The bond will double in value by year 20.
Current interest rate
Years to maturity
$15,000 per year (paper and electronic)
$10,000 per year
State and local taxes owed
Interest earned is subject to federal income taxes.
Interest earned is subject to federal income taxes.
» Learn more: How to cash savings bonds
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 May 2023 (the maximum amount of electronic I bonds you can buy in one year). Your fixed rate would be 0.90%, and your inflation rate would be 1.69%. Your composite rate of 4.30% is calculated as follows:
[Fixed rate + (2x inflation rate) + (fixed rate x inflation rate)] = composite rate
Or, in real numbers:
[0.0090 + (2 x 0.0169) + (0.0090 x 0.0169)] = 0.043
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This composite rate of TreasuryDirect Series I Savings Bond, applied to $10,000 in I bonds, would earn a guaranteed $215 in interest over the next six months (not $430, 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 TreasuryDirect Series I Savings Bond remains the same for the second six-month period. Add the first six months of interest ($215) to your original investment of $10,000 as your new principal. You'll earn the TreasuryDirect Series I Savings Bond interest rate on that new number, $10,215, for the next six months. That will result in an additional $219.50 in interest for your second six-month period, and a total of $434.50 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 $110, meaning if rates remain the same and you want to get your money out after one year you'd net $324.50 in interest. If you kept your money in the bond for five years you could keep the total minus any tax owed.
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.
» Learn more about the role bonds play in diversifying your financial portfolio
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 federal income tax (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 $100,800 if single or $158,650 if married filing jointly in 2022.
You were 24 or older before your savings bonds were issued.
» Learn about how to invest in bonds
I bonds: A low-risk investing strategy
If you're approaching a financial goal within one to five years – such as college, a wedding, a surgery or 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 your goal. You may not want to risk your hard-earned money when you're close to needing it.
Because 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.
Keep in mind, 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 die. 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 portfolio, 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.
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
If you sell an I bond before you've held it for 12 months you'll receive no interest. If you sell a bond before you've held it for five years you may lose the last three months' worth of interest.
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
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