I Bonds Explained: What They Are, How To Buy Them and More (2024)

Key Takeaways

I bonds are debt instruments backed by the full faith and credit of the U.S. government. As a result, they have no credit risk.
I bonds are also largely protected from inflation risk because they pay a rate of interest that is partially indexed to the Consumer Price Index (CPI).
The combination of these features can protect your savings from rising prices and add stability to your investment portfolio.
On the downside, I bonds are somewhat illiquid. Additionally, over the long term, I bonds can fail to deliver the returns offered by growth-oriented assets, such as stocks.

What Are I Bonds?

A U.S. Series I savings bond, or I bond, is a type of inflation-protected security issued by the U.S. Department of the Treasury. When you invest in I bonds, your money earns interest based on a fixed rate of return (set by the U.S. government), plus a variable interest rate that is indexed to the Consumer Price Index (CPI). The sum of the two rates is known as the composite rate, and it is updated every six months (in May and November).

I bonds are non-marketable, meaning you cannot buy or sell them on secondary markets like the New York Stock Exchange or the Nasdaq. Instead, you purchase I bonds directly from the U.S. Department of the Treasury.

Because these types of savings bonds are backed by the full faith and credit of the U.S. government, they have no credit risk and are said to be among the safest types of investments you can make.

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Pro Tip:

The composite rate of I bonds can never be less than 0.0%, so you will never lose your principal investment value, even during periods of deflation when the inflation rate is negative. In contrast, there is no ceiling on inflationary pressure, so the composite rate will continue to rise during periods of high inflation.

How Do I Bonds Work?

As long as you have a Social Security number, you can buy electronic or paper I bonds from the U.S. Department of the Treasury. You may purchase up to $15,000 worth of I bonds per year – $10,000 worth of electronic I bonds and $5,000 worth of paper I bonds. Paper bonds can only be purchased with an IRS tax refund.

The current composite rate for I bonds is 4.30%. This rate is locked through Oct. 31, 2023, after which it will float, depending on the level of inflation. At the time you purchase I bonds, the current composite rate will be applied for a period of six months. For example, if you were to purchase I bonds on Aug. 1, 2023, the composite rate of 4.30% would apply through Jan. 31, 2024.

Below is a detailed breakdown of how the composite rate for I bonds is calculated:

Composite Rate = Fixed Rate + (2 x Semiannual Inflation Rate) + (Fixed Rate x Semiannual Inflation Rate)

Composite Rate = 0.0090 + (2 x 0.0169) + (0.0090 x 0.0169) = 0.0429 or 4.30%

For I bonds, interest accrues monthly and is compounded semiannually, but you will not be paid until you redeem the bond. The minimum amount of time you must own I bonds before redemption is one year, but if you redeem the bonds within the first five years, you will have to pay a penalty equivalent to the last three months of interest.

When Do I Bonds Pay Interest?

Typically, bonds pay interest every six months. To fully understand how you earn interest with I bonds, it helps to look at an example. Let’s assume the following:

On Aug. 1, 2023, you purchase $10,000 of electronic I bonds.
The composite rate of the bonds you purchase is 4.30%.
You intend to hold onto the I bonds for a long time and earn as much interest as possible.
The composite rate of 4.30% will apply for six months from the date of purchase.

Based on the information above, you can expect to earn $35.83 per month ($10,000 × 0.0430 ÷ 12 = $35.83) for the first six months you own the bonds, which is August 2023 through January 2024. This means that for the first six-month period, you’ll earn $215 in interest, which makes your total investment worth $10,215.

Now, let’s say that in October 2023, a new CPI reading from the U.S. Bureau of Labor Statistics prompts the U.S. Department of the Treasury to adjust the composite rate for I bonds to 6.00%. This adjusted rate applies to any bond purchased or rolling into a new semiannual period between Nov. 1, 2023, and Apr. 30, 2024.

Since your I bond will enter into a new semiannual period on Feb. 1, 2024, you’ll earn the new rate for the six months that follow. Additionally, thanks to the power of compound interest, you’ll earn interest on your accumulated balance of $10,215 – not your initial investment of $10,000.

You can expect to earn $51.08 per month ($10,215 × 0.060 ÷ 12 = $51.08) from February 2024 to July 2024, for total earnings of $306.45 for that six-month period. Now, the total value of your investment has grown to $10,521.45 ($10,215 + $306.45 = $10,521.45).

How To Buy I Bonds

You can invest in I bonds by purchasing them directly from the U.S. Department of the Treasury via TreasuryDirect: a web portal that allows you to buy, manage and redeem electronic government savings bonds online. To create an account, all you need to do is choose an account type, provide your personal information and secure your account with a password.

Generally, you can purchase up to $10,000 of electronic I bonds in a calendar year. However, the $10,000 limit is applied at the entity level, not the individual level. So, if you operate multiple business entities, such as trusts and limited liability companies, the amount you’re allowed to invest each year can be much larger than $10,000.

I bonds are a stable investment option if you want something to offset any potential loss in your portfolio. Contact a financial professional to see if I bonds would be a good idea for your investment goals.
Timothy Li, MBABusiness Finance Manager
Timothy Li, MBA, has dedicated his career to increasing profitability for his clients, including Fortune 500 companies. Timothy currently serves as a business finance manager where he researches ways to increase profitability within the supply chain, logistics and sales departments.

Can You Buy I Bonds at a Bank?

You cannot buy I bonds at a bank or through a brokerage account. There are only two ways to buy I bonds: either electronically via the TreasuryDirect.gov portal or in a paper format using your tax refund.

To buy paper I bonds, use IRS Form 8888 to specify how much of your refund should go to savings bonds and how much to you directly (by a check or direct deposit to your bank account). On Form 8888, you also need to specify who will own the bonds (in the event you are buying them as a gift for someone else).

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I Bonds vs. Other Investments

I bonds are a good investment option for people with a low tolerance for credit risk, inflation risk and/or the ability to endure some illiquidity. However, they are not ideal for everyone. There are a few scenarios where other investment options can make more sense:

If you want to earn a competitive interest rate, but are uncomfortable with being exposed to any degree of illiquidity or price volatility, a high-yield savings account is a sensible option – especially if you are comfortable with online banking.
If you are a conservative, fixed-income investor that wants more yield and believes inflation will continue to moderate, consider putting your money into other investment-grade bonds, such as high-quality corporate securities, municipals and mortgage-backed securities. An index fund that tracks the Bloomberg Barclays Agg could be a sensible option.
If you have a long investing horizon and desire to accumulate wealth, consider putting your money into stocks. These financial securities offer you the chance to participate in the long-term success of a publicly-traded company (or a group of publicly-traded companies).

That said, Annuity.org does not advocate one-off stock purchases. Rather, our experts recommend you invest in stocks in a diversified manner. An ideal way to do so is via low-cost, fund-style vehicles, such as index funds and exchange-traded funds.

I Bonds Pros and Cons

As previously discussed, I bonds are very safe debt instruments issued by the U.S. government. They are free from both credit risk and inflation risk, and they currently offer a solid risk-adjusted return.

That said, I bonds do have some disadvantages, including their one-year liquidity lock-up and five-year early redemption penalty. For investors with long horizons, I bonds can also fail to deliver the returns offered by growth-oriented assets, such as stocks.

The table below summarizes the most important advantages and disadvantages of I bonds.

Pros & Cons

Pros

Provides an excellent hedge against inflation
Interest is exempt from state/local income tax
Very safe investment that can serve as stabilizing force in a portfolio
Easy to purchase, manage and redeem online via TreasuryDirect.gov

Cons

Usually, annual investment is limited to $10k
One-year lock-up period can be prohibitive
Interest penalty for redemption within five years can be restrictive
Relatively inferior option for investors with a long horizon due to too much opportunity cost

Frequently Asked Questions About I Bonds

What is the current interest rate for I bonds?

The current annualized composite rate for I bonds is 4.30%. This rate is locked through Oct. 31, 2023 – after which it will float, depending on the level of inflation.

How long does it take I bonds to mature?

I bonds mature after an initial period of 20 years, but the maturity period may be extended by an additional 10 years. This means I bonds can continue to earn interest for a total period of 30 years — or until you redeem the bond, if that happens sooner. After a period of 30 years, the bond will automatically be redeemed.

Are I bonds taxable?

Any interest you earn on I bonds is subject to federal income tax, but you can exclude some or all of it from your federal income tax if you’re paying for certain educational expenses at the time you redeem your bonds. Regardless, taxpayers have the option to defer taxation until the interest is received at redemption. At the state and local level, you will not pay taxes on any interest earned on I bonds.

Are I bonds a good investment?

I bonds are not necessarily a good or bad investment. They make sense for some investors but can be inadequate for others. The decision whether to include I bonds in your portfolio is dependent on your investment objectives and your tolerance for risk.

Editor Malori Malone contributed to this article.

I'm Timothy Li, an MBA with a specialization in Business Finance, currently serving as a Business Finance Manager. I've dedicated my career to increasing profitability for clients, including Fortune 500 companies. My expertise lies in researching ways to enhance profitability within the supply chain, logistics, and sales departments. Now, let's delve into the comprehensive breakdown of the concepts discussed in the article on I Bonds.

I Bonds Overview: I Bonds are inflation-protected savings bonds issued by the U.S. Department of the Treasury, backed by the full faith and credit of the U.S. government. The primary characteristics include:

Credit Risk and Inflation Protection:
- I Bonds have no credit risk, being backed by the U.S. government.
- They offer protection against inflation, with interest rates linked to the Consumer Price Index (CPI).
Illiquidity:
- I Bonds are somewhat illiquid, as they are non-marketable and cannot be traded on secondary markets.
Returns and Downsides:
- While they provide stability and protection against inflation, I Bonds may not deliver returns comparable to growth-oriented assets like stocks in the long term.

How I Bonds Work:

Interest Calculation:
- The composite rate is the sum of a fixed rate and twice the semiannual inflation rate, plus the product of the fixed rate and the semiannual inflation rate.
- Interest accrues monthly, compounded semiannually, and is paid upon bond redemption.
Purchase and Ownership:
- Individuals with a Social Security number can buy I Bonds, with annual limits of $15,000 ($10,000 electronic and $5,000 paper).
- The composite rate at purchase remains fixed for six months.
Redemption and Penalties:
- Minimum ownership before redemption is one year, and redeeming within the first five years incurs a penalty equivalent to the last three months of interest.

Interest Payment Timing:

I Bonds pay interest every six months.

Purchasing I Bonds:

I Bonds can be bought directly from the U.S. Department of the Treasury through TreasuryDirect, an online portal.
Electronic bonds have a yearly limit of $10,000, applied at the entity level.

Comparison with Other Investments:

I Bonds vs. High-Yield Savings Account:
- I Bonds suit those averse to illiquidity; high-yield savings accounts are for those seeking competitive interest without exposure to volatility.
I Bonds vs. Other Bonds:
- Conservative investors may consider other investment-grade bonds for higher yield.
- Stocks are preferable for long-term wealth accumulation.

Pros and Cons of I Bonds:

Advantages:
- Hedge against inflation.
- Interest exempt from state/local income tax.
- Stability and safety.
Disadvantages:
- Annual investment limit of $10,000.
- One-year lock-up period.
- Five-year penalty for early redemption.

FAQs:

Current Interest Rate:
- The annualized composite rate for I Bonds is 4.30%, locked until Oct. 31, 2023.
Maturity Period:
- Initial maturity is 20 years, extendable up to 30 years.
Taxation:
- Interest is subject to federal income tax, but exemptions are available for certain educational expenses.
Suitability as an Investment:
- The suitability of I Bonds depends on individual investment objectives and risk tolerance.

As you consider I Bonds, remember to take a balanced approach and adapt to the ever-changing economic environment.