I Bonds

Series I savings bonds, or I bonds, are financial securities issued by the U.S. government that earn interest from both a fixed rate and a variable inflation rate set twice a year. Investing in I bonds can protect your savings from the negative effects of inflation and add stability to your investment portfolio.

Thomas Brock, CFA, CPA, expert contributor to Annuity.org
  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Expert Contributor

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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    Savannah Hanson
    Savannah Hanson, financial editor for Annuity.org

    Savannah Hanson

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    Savannah Hanson is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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    Timothy Li, MBA

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    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.

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  • Updated: December 21, 2022
  • 10 min read time
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How to Cite Annuity.org's Article

APA Brock, T. J. (2022, December 21). I Bonds. Annuity.org. Retrieved January 27, 2023, from https://www.annuity.org/personal-finance/banking/bonds/i-bonds/

MLA Brock, Thomas J. "I Bonds." Annuity.org, 21 Dec 2022, https://www.annuity.org/personal-finance/banking/bonds/i-bonds/.

Chicago Brock, Thomas J. "I Bonds." Annuity.org. Last modified December 21, 2022. https://www.annuity.org/personal-finance/banking/bonds/i-bonds/.

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’s updated every six months (in May and November) when the new inflation rate is calculated.

I bonds are non-marketable, meaning that you can’t 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 backing of the U.S. government, they have no credit risk and are said to be one of the safest possible investments you can make.

Note:
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 Treasury. You may purchase up to $15,000 worth of electronic I bonds per calendar year, or $5,000 in paper I bonds. The current composite rate for I bonds is 9.62%.

This rate is locked through Oct. 31, 2022, 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, 2022, the composite rate of 9.62% would apply through Jan. 31, 2023.

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

Fixed Rate + (2 x Semiannual Inflation Rate) + (Fixed Rate x Semiannual Inflation Rate) = Composite Rate
0.0000 + (2 x 0.0481) + (0.0000 x 0.0481) = 0.0962, or 9.62%

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

How You Earn Interest with I Bonds

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, 2022, you purchase $10,000 of electronic I bonds.
  • The composite rate of the bonds you purchase is 9.62%.
  • You intend to hold onto the I bonds for a long time and earn as much interest as possible.
  • The composite rate of 9.62% will apply for six months from your date of purchase.

Based on the information above, you can expect to earn $80.17 per month ($10,000 × 0.0962 ÷ 12 = $80.17) for the first six months you own the bonds, which is August 2022 through January 2023. This means that for the first six-month period, you’ll earn $481 in interest, which makes your total investment worth $10,481.

Now, let’s assume that in October 2022, 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 10%. This adjusted rate applies to any bond purchased or rolling into a new semiannual period between Nov. 1, 2022, and April 30, 2023.

Since your I bonds will enter into a new semiannual period on Feb. 1, 2023, 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 $10,481, not your initial investment of $10,000.

You can expect to earn $87.34 per month ($10,481 × 0.1000 ÷ 12 = $87.34) from February 2023 to July 2023, for a total earnings of $524.05 for that six-month period. Now, the total value of your investment has grown to $11,005.05 ($10,481 + $524.05 = $11,005.05).

As long as you hold the investment, this semiannual pattern of adjusting for inflation and compounding your accumulated interest will continue. Over long periods of high inflation, the growth can be significant.

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Where Can You Buy I Bonds?

You can invest in I bonds by purchasing them directly from the U.S. Department of the Treasury. The easiest way to do this is on TreasuryDirect, a government web portal that allows you to purchase, manage and redeem electronic government savings bond online. To create an account, you’ll 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.

How Long Does It Take for 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 that I bonds can continue to earn interest for a 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.

What Are the Pros and Cons of I Bonds?

As we’ve already 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 risk-adjusted return that is hard to beat.

That said, I bonds do have some disadvantages, such as the fact that the bonds cannot be redeemed for one year after purchase and their early redemption penalties. If you redeem your I bond within five years of purchasing it, you’ll lose the last three months of interest the bond earns. For investors with long horizons, I bonds can also fail to deliver the returns offered by other assets, such as stocks.

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

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 prohibitive
  • Relatively inferior option for investors with long horizon (too much opportunity cost)

As you size up this investment opportunity, be sure to take a balanced approach. Also, remember that the economic environment is always in a state of flux. Given today’s surging prices, I bonds make a lot of sense to invest in, but they may not be as attractive when inflation rates are not as high.

What Are the Tax Implications of Buying I Bonds?

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 actually paid out at redemption. At the state and local level, you won’t pay taxes on any interest you earn from I bonds.

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Last Modified: December 21, 2022
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3 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. TreasuryDirect. (n.d.). Open An Account: Intro. Retrieved from https://www.treasurydirect.gov/RS/UN-AccountCreate.do
  2. TreasuryDirect. (2022, May 2). Series I Savings Bonds. Retrieved from https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
  3. U.S. Bureau of Labor Statistics. (n.d.). Consumer Price Index. Retrieved from https://www.bls.gov/cpi