What Are I-Bonds? Are They Worth Investing In?

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If you're looking for a way to beat inflation, I bonds may be the answer. If you haven't heard of them and ask yourself, 'what are I bonds,' keep reading to learn more.

What Are I Bonds?

I bonds are bonds issued by the U.S. Treasury. They pay interest based on the current inflation rate. The interest paid by I Bonds adjusts every six months as determined by the U.S. Treasury Department.

I bonds are a safe investment, much like savings bonds, except they pay much higher interest. Because they are government-backed, they are a low-risk investment, allowing investors to diversify their portfolios with little risk.

I bond rates are made up of a fixed interest rate and a semiannual inflation rate. The result is the composite rate which is calculated as follows:

Composite rate = (fixed rate + (2 x current inflation rate) + (fixed rate x current inflation rate))

Fixed Rates

The U.S. Treasury Department sets the fixed rate that remains the same for the bond's life. Today the fixed rate is 0%, but that's because the inflation rates are higher than they've been in decades. You can check the Treasury Direct website to see the current fixed rate. The rate changes every six months.

When inflation rates are high, the fixed rate is much lower, sometimes as low as 0% as it is currently. But, when inflation rates are low, the fixed rates are higher.

Inflation Rates

The I bonds interest rate also includes an inflation rate. The Bureau of Fiscal Service announces the rate every six months (May 1 and September 1). The rate changes based on the Consumer Price Index for all Urban Consumers.

Right now, inflation rates are very high, so I bonds are a great way to hedge against inflation. Moreover, unlike stock market investments that lose money during inflation, I bonds offer a stable return equal to inflation.

Series I Savings Bond Benefits

The most significant benefit of U.S. Treasury I bonds is their protection from inflation. Not many investments are based on the inflationary rate, protecting you from high rates and losing too much money.

Other benefits of buying I Bonds include:

Interest is compounded semiannually, which means your earnings earn interest
You can cash your bond out after one year, although it's not recommended
I bonds are exempt from state and local taxes (not federal)
Government-issued bonds have close to a zero percent risk of default
You can use your federal income tax refund to buy I bonds

How to Buy I Bonds

You can only buy I bonds from the Treasury Direct website. There isn't a secondary market for I series bonds.

To buy I bonds, you must first choose paper or electronic bonds. If you prefer paper, you can only buy them with your federal income tax return refund. Anyone can buy electronic bonds online.

Once you decide how much you'll invest in bonds, you buy the bond for its face value. For example, a $50 bond costs $50. You then decide how long you'll keep the bond. While you must keep it for one year, you can sell it when you want after that point. However, keep in mind that you'll lose three months of interest selling it before five years.

Who Sells I Series Bonds

Treasury Direct sells I series bonds. You can buy them from the Treasury Direct website and cash them in there too. However, you can't cash in I bonds any other way. For example, there isn't a stock market to sell your bonds and liquidate your investment.

Where Are I Bonds Sold?

You can buy electronic I bonds or paper bonds. Both are sold directly from Treasury Direct.

What To Do

To purchase electronic I bonds, you must set up an account at www.treasurydirect.gov. Then, you'll conduct the transaction online and can manage your account, including selling your bonds when you're ready.

If you prefer paper bonds, you can use your federal income tax return refund to buy paper bonds.

You must purchase a minimum of $25 in electronic I bonds. You can purchase up to $10,000 in electronic bonds. If you purchase paper bonds, they have a minimum purchase of $50 and a maximum of $5,000.

Taxing Series I Bonds

When you purchase I bonds, you'll owe taxes, but not the typical taxes you'd pay on other investments. I bonds are exempt from state and local income taxes. However, you will pay federal taxes on them.

You pay taxes on the earned interest, but you have options on how you pay it. For example, investors can pay taxes annually, on the I bonds maturity date, or when they cash the bond in.

If you use the proceeds of the bond to pay for qualified higher education expenses, the earnings are tax-exempt.

If you buy I bonds for a gift, the owner is responsible for paying taxes on all interest earned.

I Bonds Calculator

To understand the value of your I bonds, you can use the Treasury Direct I bonds calculator. This is for paper bonds only, though. To determine the value of your electronic bonds, log into your Treasury Direct account.

With the calculator, you can find today's value of your Series I bond, create a potential inventory of bonds, and see what your paper bond values are in other months.

Cashing In I Bonds

I bond's maturity is 30 years. But you can cash them in early if you need. However, no investor can cash the bonds in during the first year. Between years two and five, you can cash the bonds in but forfeit three months of interest (you lose the last three months of interest).

After year five, there isn't a penalty for cashing in your bond. To cash your electronic bonds, you handle the transaction on the Treasury Direct website. If you have paper bonds, you can cash them in at your local bank.

Obviously, the longer you hold onto your I bonds, the more interest you earn. Since bonds earn interest monthly, the longer you hold onto them, the more money you'll make. Don't invest in I bonds if you have an immediate need for the funds, though, because they aren't liquid for the first 12 months you own them.

I Bonds vs. EE Bonds

The U.S. Treasury sells I bonds and E.E. bonds. Both are risk-free investments issued by the U.S. government. Here's how they compare if you want to invest in bonds.

Similarities

You pay the face value of both I Bonds and E.E. bonds. They pay interest monthly, but the interest is compounded semiannually. You can cash in I Bonds and E.E. bonds after one year of buying them, and if you cash them in early (before owning them for five years), you'll pay three months of interest.

You must purchase at least $25 of I Bonds and E.E. bonds. Both bonds don't incur state and local taxes, but federal tax accrues.

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Differences

E.E. bonds earn interest but at a fixed rate. Therefore, the rate doesn't adjust according to the inflation rate like the Series I bond interest rate. However, E.E. bonds have a guaranteed investment. You are guaranteed to double your investment if you keep the bonds for 20 years. Series I savings bonds don't have that guarantee since the rates change every six months.

Finally, you can purchase up to $10,000 in E.E. bonds but $15,000 in I bonds.

I Bond Rates

The I series bond rate changes every six months. There's no guarantee that it will increase and no protection from it decreasing. The rates vary based on the current inflation rate, which is why many investors buy them as a protection against inflation.

I Bond Interest Rate History

Historically, I bond rates are about as high as they've been because we're seeing record inflation rates right now. This is balanced by the 0% fixed rate offered. As the Fed settles the economy and slows down inflation, the inflation rate will decrease, and the fixed rate will increase.

I Bonds Current Rate

The current I bonds rate is 9.62%, which is historically high. The rate changes every six months. This year the next change is November 1 and will depend on the inflation rate at the time.

I Bond Rates Prediction

If inflation rates continue increasing, the I bonds rate will increase too. However, if the inflation rate falls, I bonds rates will fall too. How the Fed controls inflation will determine what happens with the next rate change in November.

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Series I Savings Bonds FAQ

Are I Bonds a Good Investment?

Right now, I bonds are better than most CDs and even some riskier investments. The question is, will the return stay as high as they are right now? The answer is probably no because inflation can't go on this way forever.

So are they a good investment? They can be if you want to add a conservative investment to your portfolio. It can be a great addition to any portfolio if you don't need the money in less than one year.

When Do I Bonds Mature?

I bonds maturity is 30 years. However, this doesn't mean you can't cash them in for 30 years. You must wait 12 months to cash your bonds in, and if you cash them in before five years, you'll pay the penalty, but you can cash them in sooner. If you wait at least five years, you can cash them in without paying the penalty.

Can You Lose Money on I Bonds?

I bonds are a unique investment because you can't lose money investing in them. The U.S. government guarantees them. So you might not always earn the high-interest rates they pay now, but you won't lose money investing in them.

Can Everyone Buy I Series Bonds?

To buy I bonds, you must be at least 18 years old, a U.S. citizen, and a U.S. resident. However, adults can buy I bonds for kids as gifts so that children can own I bonds.

Should I Buy I Bonds: The Bottom Line

Now that you know the answer to 'what are I bonds,' you can invest in this conservative and inflation-protected investment. They can be a great addition to a risky portfolio, offsetting the risks inflation cause and allowing you to have a guaranteed return on your investment.

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