Series I Savings bonds are inflation-protected savings bonds issued by the U.S. government that earn interest based on a fixed rate plus an adjustable inflation rate tied to the Consumer Price Index. The U.S. Treasury Department issues I Bonds and guarantees a yield that beats inflation. Investors commonly buy I Bonds to protect themselves from inflation.
Summary:
- I Bonds are low-risk savings bonds issued by the U.S. Treasury to protect your cash from inflation.
- I Bonds issued between November 1, 2023 and April 30, 2024 have a current annual composite interest rate of 5.27%. This interest is paid and compounds semi-annually.
- I Bonds have a maximum purchase limit of $15,000 per calendar year per individual and must be held for a year.
What Are I Bonds?
I Bonds are inflation-protected savings bonds issued by the U.S. government. They earn interest based on a fixed rate plus an adjustable inflation rate tied to the Consumer Price Index. This makes I Bonds an attractive investment option for those looking to protect their savings from the eroding effects of inflation.
These bonds are considered to be one of the safest bonds available, as they are backed by the full faith and credit of the U.S. government.
How Do I Bonds Work?
I Bonds pay interest every six months based on a composite rate. This composite rate is updated every six months to account for inflation.
The composite rate comprises a fixed interest rate (set by the U.S. Treasury when you buy the I Bond) and a variable inflation rate. The variable inflation rate is adjusted twice annually and indexed against the Consumer Price Index (CPI).
There is a purchase limit of $10,000 for electronic I Bonds and $5,000 for paper I Bonds, for a total of $15,000 I Bonds annually.
Electronic I Bonds can be purchased at TreasuryDirect starting with a minimum investment of $25.
Paper I Bonds can only be purchased with federal tax refunds. These are sold in denominations of $50, $75, $100, $200, $500, and $1,000.
I Bonds can earn interest for up to 30 years. You can’t cash them out in the first 12 months, and you’ll give up three months’ interest if you cash out your I Bonds before five years.
A great feature of I Bonds is that the earnings are exempt from state and local tax. You only need to pay federal tax and don’t need to do this until you cash out the I Bond. In addition, if you’re using I Bonds to pay for higher education, you might not need to pay any taxes on your I Bond earnings.
When Do I Earn Interest on an I Bond?
When you buy an I Bond, the interest starts to build up from the first day of that same month, regardless of the actual day you made the purchase. So, even if you buy the bond on the last day of the month, you’ll still earn interest as if you had it for the entire month.
On the other hand, when you decide to cash out your I Bond, the opposite is true: you won’t earn any interest for the entire month in which you redeem it, no matter whether you do so on the first day or the last day of that month.
Example:
- Buying: If you purchase an I Bond on July 29th, you will earn interest for the entire month of July, starting from July 1st.
- Cashing Out: If you then decide to redeem the I Bond on October 31st, you will not earn any interest for October. Your interest will be calculated up to the end of September.
In summary, the interest for the month you buy an I Bond is fully credited to you, while the interest for the month you redeem it is entirely forfeited.
A tactic that some investors use is to buy an I Bond as close to the end of the month as possible and to redeem it as early in the month as possible.
While you begin accruing interest from the day you buy the bond, you won’t have access to this interest until you cash out the I Bond. The interest you earn from I Bonds compounds semiannually and adds to the bond’s value twice a year.
Why Is My Series I Savings Bond Not Showing Interest?
When you buy an I Bond, the interest doesn’t appear in your TreasuryDirect account immediately.
Instead, it will be displayed on the first day of the fifth month after your purchase. This delay is because I Bonds have a three-month interest penalty for early redemption, so the interest is only posted after this period to account for that rule.
How Do I Buy an I Bond?
There are two ways to buy an I Bond.
The first way is to buy I Bonds electronically directly from the U.S. Department of the Treasury through their online platform, TreasuryDirect.gov. The annual purchase limit for electronic I Bonds is $10,000.
The second way is to buy paper I Bonds up to $5,000 from your federal tax return.
Electronic I Bonds are redeemed on TreasuryDirect.gov, while paper I Bonds are redeemed at a local bank or credit union.
Buying I Bonds at a Bank or a Brokerage Account
I Bonds cannot be bought at a bank or a brokerage account. The only two ways to buy I Bonds are electronically via TreasuryDirect.gov or through your tax refund.
To buy paper I Bonds, you should use IRS Form 8888 to specify how much your tax refund should go to purchasing paper Series I Bonds.
What Is the Current Rate for I Bonds?
The current of I Bonds is 5.27%. This rate was set on November 1, 2023 and is fixed until April 30, 2024.
How Is the I Bond Rate Calculated?
The I Bonds rate formula can be found on TreasuryDirect.
Here is a breakdown of the I Bonds composite rate formula:
Composite rate formula: [Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
When Do I Bonds Mature?
I Bonds are meant to be long-term investments. They can earn interest for up to 30 years. Here’s a breakdown of their maturity:
- Original Maturity: I Bonds have an original maturity of 20 years from the issue date.
- Extension Period: After the 20-year original maturity period, I Bonds automatically enter into an extension period of an additional ten years, giving them a total maturity period of 30 years from the issue date.
- Interest Earning: During the entire 30-year period (both the original 20-year period and the 10-year extension), the I Bond will continue to earn interest.
- Redemption: You can redeem I Bonds after holding them for 12 months. However, if you redeem them before you’ve held them for five years, you’ll lose the last 3 months of interest as a penalty. After five years, there’s no penalty upon redemption.
Which Investors Are I Bonds Good For?
I Bonds are a tool for people looking for a virtually risk-free investment that will protect some of your cash from inflation.
The primary limitation to I Bonds is that you are capped to a $15,000 annual purchase limit. The bonds are also not very liquid due to the minimum 12-month holding period and an early withdrawal penalty if redeemed before five years.
However, for people with $10,000 sitting in a savings account that won’t be needed for a while, I Bonds can be a great tool to earn risk-free, inflating-beating compound interest.
What Are the Tax Implications for I Bond Earnings?
I Bonds have specific tax advantages and implications for their earnings.
- Federal Taxes:
- Tax Deferral: The interest earned on I Bonds is subject to federal tax. However, you can defer paying taxes on this interest until you redeem the bond or until it reaches maturity (whichever comes first). This allows the interest to compound tax-free for potentially up to 30 years.
- Yearly Reporting Option: While most people choose to defer the taxes until redemption or maturity, you also have the option to report and pay taxes on the interest annually. This might be a choice for some who anticipate being in a higher tax bracket upon redemption or for other personal financial planning reasons.
- State and Local Taxes:
- Interest earned from I Bonds is exempt from state and local taxes. This benefits investors in high-tax states.
- Education Tax Exclusion:
- If you use I Bond proceeds to pay for qualified higher education expenses in the same year you redeem the bond, you might be able to exclude all or part of the interest from your taxable income. However, there are several conditions to meet:
- The bond must have been issued after 1989.
- The bond owner must be at least 24 years old before the bond’s issue date.
- The bond must be registered in the name of at least one parent (if bought for a child).
- The money must be used for qualified education expenses, such as tuition and fees.
- There are income limits; high-income earners might not qualify for the exclusion.
- If you use I Bond proceeds to pay for qualified higher education expenses in the same year you redeem the bond, you might be able to exclude all or part of the interest from your taxable income. However, there are several conditions to meet:
- Estate and Gift Taxes:
- Interest from I Bonds is typically included in the deceased’s federal gross estate. However, heirs or beneficiaries who inherit I Bonds can opt to report the accrued interest up to the date of the original owner’s death on their federal income tax return for that year, which means the interest won’t be taxable when the bond is later cashed.
What Tax Form Do I Need to Get My Tax Return on Series I Savings Bonds?
If you want to use your tax refund to purchase Series I Savings Bonds, you’ll need to fill out IRS Form 8888, titled “Allocation of Refund (Including Savings Bond Purchases).”
A Tactic to Buy More Than $15,000 I Bonds a Year
Individuals are capped at $15,000 worth of I Bond purchases a year. However, some individuals employ an I Bond loophole to buy more than this cap in a single year.
If you purchase I Bonds with a spouse or partner, you have separate annual limits. That means in addition to the $10,000 that can be purchased electronically for each (for a total of $20,000), each individual can use up to $5,000 of their respective tax refunds to buy I Bonds. A couple can buy up to $30,000 in I Bonds every year.
Secondly, you can buy I Bonds as gifts to others, such as children or grandchildren. The bonds would be in the recipients’ names and Social Security Numbers.
Finally, I Bonds can be purchased by trusts, estates, corporations, partnerships, and other entities. This allows for additional allocation beyond personal purchases.
Alternatives to I Bonds
When considering safe and inflation-protected investments, many investors naturally gravitate towards I Bonds, backed by the U.S. government and known for their inflation-adjusted returns. However, you can also consider the following.
- TIPS (Treasury Inflation-Protected Securities): Like I Bonds, TIPS are issued by the U.S. Treasury and offer inflation protection. The principal value of TIPS adjusts with changes in the Consumer Price Index (CPI). The interest rate is fixed but generates interest based on the adjusted principal. TIPS and I Bonds are the only two inflation-protected bonds issued by the U.S. Treasury to protect against inflation.
- Treasury Bonds, Treasury Notes, and Treasury Bills: Treasuries are fixed-interest government securities with varying maturities. They don’t guarantee inflation protection but provide safety and predictable returns. Treasury bills have short-term maturities of less than a year and are popular investments to park cash.
- Floating Rate Notes (FRNs): FRNs are issued by the U.S. Treasury. These bonds pay an interest rate based on the 13-week Treasury bill rate.
- Series EE Bonds: These bonds are designed to double in value over 20 years, translating to a fixed interest rate of about 3.5%. They do not fluctuate with inflation.
- Brokered CDs: Bank CDs purchased from a brokerage. Investments with a fixed rate of return and insurance up to $250,000 per depositor per bank.
Series EE Bonds vs. I Savings Bonds?
Series EE Bonds offer a fixed interest rate and a unique feature: they’re guaranteed to double in value if held for 20 years, effectively yielding a 3.5% annual return over that period.
On the other hand, I Bonds come with a combined interest rate: a fixed rate plus an inflation rate. This structure offers protection against inflation, ensuring your savings maintain their purchasing power. The rate adjusts semi-annually based on inflation trends, making it more dynamic.
Both bonds offer tax advantages. Interest accrual is tax-deferred until redemption, and there are potential tax breaks if used for educational purposes. Both are safe, being government-backed securities.
Can You Lose Money on I Bonds?
No, one of the primary benefits of I Bonds is that they are designed to preserve your principal investment, meaning you cannot lose the initial amount you invested.
I Bonds are issued by the U.S. Department of the Treasury, making them one of the safest investments since they’re backed by the full faith and credit of the U.S. government.
