If you’re looking for a low-risk way to keep your money safe from inflation, you may want to consider Series I savings bonds. Also known simply as I bonds, these securities are issued and backed by the full faith of the United States government.
These government-backed securities come with several key benefits, including that they earn interest, but there are risks to consider as well.
What are I bonds?
Series I savings bonds are US savings bonds meant to protect your money from inflation, and they became a popular investment in recent years amid decades-high consumer prices.
Like high-yield savings accounts and certificates of deposits (CDs), I bonds currently offer attractive interest rates. But these savings bonds are unique in that their interest rate is pegged to inflation and adjusted every six months.
I bonds earn interest every month, and that interest is compounded twice a year. In other words, every six months the I bond’s interest rate is applied to the principal (the original cost of the bond), causing the bond’s overall value to grow over time. The interest compounds for 30 years, unless you cash in your bond before it matures, which you can only do after 12 months. If you cash out within five years, you’ll lose three months of interest.
Are I bonds a good investment?
Depending on how they’re used, I bonds can be a good investment thanks to their backing by the US government, said Gage Silverman, investment analyst at Fort Pitt Capital Group in Pittsburgh, Pennsylvania. Unlike with stocks, you can’t lose money on the principal you put into savings bonds (though you can lose interest if you cash out your bond too early).
Financial advisors tend to recommend investing money for long-term goals like retirement via the financial markets. However, because I bonds are only able to be sold after a year and incur a penalty if cashed within five years, they may make sense for an investor looking for a low-risk way to bulk up the cash or fixed income area of their portfolio —but make sure to review all your options.
“While I bonds can be a good investment, we believe there are better opportunities in the market,” Silverman said. That’s in part due to slowing inflation and the fact that “I bonds benefit the most from surprise inflation to the upside.”
Risks and benefits of investing in I bonds
Because I bonds are backed by the US government, they’re essentially risk-free. But the current 4.28% yield of newly issued I bonds may not be as compelling as the yields of other financial instruments, such as Treasury bills, Treasury bonds, money market funds or CDs, said Crewe Advisors chief investment officer Dustin Thackeray. By putting extra cash to work with I bonds rather than these other investments that have similar levels of risk, you could be missing out on higher yields.
“If inflation continues to trend lower, as some market participants expect, it would be anticipated that the yields on I bonds would continue to reset to lower rates,” Thackeray added.
But I bonds do come with benefits aside from inflation protection. While you’ll owe federal taxes on the interest earned via these bonds, they’re exempt from state and local income tax. There are also federal tax exemptions for I bonds used to cover qualified educational expenses.
| Benefits | Risks |
|---|---|
Backed by the US government | Lower current yield than other investments |
Yield adjusts higher if inflation rises | Yield adjusts lower if inflation falls |
Interest earned is exempt from federal taxes | Interest penalty if cashed in before five years |
How to buy I bonds
You can buy electronic or paper I bonds from the US Treasury. To buy an electronic I bond:
- Visit the Treasury’s website and open a TreasuryDirect account. You’ll need to provide a Tax ID number (a Social Security number or Employer Identification Number), email address, bank account and routing number to open an account.
- Use the Treasury’s BuyDirect feature, and indicate that you want to buy a Series I bond (as opposed to a Series EE bond).
- Fill out your purchase information. You’ll need to indicate who owns the bond —as in, register it for yourself or to a gift recipient who also has a TreasuryDirect account.
You can buy electronic I bonds for any amount of money between $25 to $10,000, up to a maximum of $10,000 per year.
To buy a paper I bond:
- File your taxes.
- Use IRS Form 8888 to tell the government how much of your tax return should go to a savings bond.
- Indicate who will own the I bond, which you can also do on IRS Form 8888.
You can buy up to $5,000 of paper I bonds in $50 increments.
You can also set up a Payroll Savings Plan via your TreasuryDirect account to set aside money directly from your employer for savings bonds.
How to calculate I bond composite interest rate
I bond interest rates have two independent components:
- The annual fixed rate, set on May 1 and November 1 of each year, which applies to I bonds issued within the following six months and lasts for the bond’s life
- The semiannual inflation rate, also set on May 1 and November 1 of each year, which can rise or fall with fluctuations in the Consumer Price Index (CPI) — an economic indicator that represents changes in the price of US goods and services
I bonds issued from May through October of 2024 have a fixed rate of 1.3%. The current semiannual inflation rate is 1.48%.
The formula to calculate the composite rate, which is the combined rate you would actually earn on an I bond, is as follows:
Composite rate = fixed rate＋(2 ⨉ semiannual inflation rate)＋(fixed rate ⨉ semiannual inflation rate)
Using the latest rates, the formula works out to a current composite rate of 4.28%:
0.0428 = 0.013＋(2 ⨉ 0.0148)＋(0.013 ⨉ 0.0148)
How to redeem Series I bonds?
You can cash in Series I bonds after one year, but if you do so within five years, you’ll lose three months of interest.
To cash in electronic I bonds:
- Visit your TreasuryDirect account.
- Navigate to ManageDirect.
- Follow the link for cashing securities.
- Choose to redeem either a partial amount or in full.
- Look for the 1099-INT in your TreasuryDirect account in January of the year after you cash your bond to use when filing taxes.
To cash out a paper I bond:
You can either ask your bank if they will cash the bond or fill out FS Form 1522 and send it to the address listed on the form. If you are cashing out more than $1,000, you’ll need to have your signature verified. A bank that cashes out your I bond will provide you with the 1099-INT form. If you cash out via the Treasury Department, you’ll receive your tax form in the mail.
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Frequently asked questions (FAQs)
You can cash out I bonds any time after one year, though you’ll lose three months’ worth of interest if you cash them out within five years. You can hold — and keep earning interest on — I bonds for 30 years.
While the interest rate on I bonds changes every six months, the rate on Series EE savings bonds stays the same for at least 20 years. The US government guarantees the interest rate on I bonds won’t fall below zero, but it guarantees that the value of an EE bond will be at least double what you paid for it after 20 years. And while you can get paper or electronic I bonds, new EE bonds are only available electronically.
The interest you earn on I bonds is subject to federal income tax but exempt from state and local income tax. Federal tax exemptions are also available if you use the money from the bond for eligible education expenses.
I bonds earn interest monthly, and that interest compounds every six months. But you don’t actually get paid the interest until the bond matures or is cashed.
