I Bonds: How To Buy Them And Decide Whether They’re A Good Investment

When it comes to investing your hard-earned money, you want to make sure you’ll get some kind of return.

Bonds, issued by governments and corporations to raise money, certainly have their place in a well-diversified portfolio. There’s a specific type of bond that offers two interst rates, one tied to inflation and the other a fixed rate. These are called I Bonds.

Learn more about I bonds and whether they are the right type of investment for your situation.

What Are I Bonds?

Series I savings bonds (known as I Bonds) are debt securities issued by the Department of the Treasury and ultimately, allow you to lend money to the government. Series I savings bonds protect you from inflation because you earn a fixed interest rate and a rate that changes with inflation.

A portion of I bond interest pays out at a fixed interest rate, while the rest pays out at a variable, inflation-adjusted rate, allowing your money to compound over time. The inflation rate is calculated twice a year, in May and November.

You can get an I bond via paper or electronically. The TreasuryDirect website allows investors to purchase up to $10,000 in I bonds annually electronically. You can only buy paper I bonds by using your IRS tax refund. You can purchase paper I bond costs worth $50, $100, $200, $500 and $1,000.

Series I bonds are exempt from state and local taxes, but interest is taxes at the federal level.

Brief History Of I Bonds

I bonds were first introduced in 1998. In 1999, individuals could purchase Series I savings bonds online. In October 2022, an electronic version of the inflation-indexed Series I savings bond became available. The annual purchase limit went up to $30,000 on paper and electronic Series I savings bonds in the same year.

Other key changes include:

• In 2003, the minimum holding period extended from 6 to 12 months. The annual savings bonds purchase limit decreased from $30,000 to $5,000 in 2008.
• In 2010, you could buy paper Series I savings bonds through your tax return, without purchasing directly from the U.S. Treasury.
• In 2012, the annual purchase limit increased to $10,000 of electronic savings I bonds in one calendar year. You can purchase up to $5,000 in Series I paper savings bonds through your tax refund.

Difference Between I Bonds And EE Bonds

The largest difference between I bonds and EE bonds have to do with the interest rate. The Series EE savings bond carries a fixed interest rate. The U.S. government commits to a doubled face value at a fixed interest rate for at least the first 20 years. I bonds, on the other hand, do not guarantee value at maturity – you get a fixed interest rate on a portion plus an adjustable interest rate based on inflation.

I Bond Tax Implications

I bonds are subject to taxation – you don't get taxed on the original amount you invest, just the interest you earn. You also only owe money to the federal government, not your state government.

Note that you can refrain from paying taxes on I bonds altogether if you use the money to pay for higher education. Your income must be under a certain limit and you must give the money directly to a qualified college, university or career school the same year you redeem the bond, through IRS Form 8815. Talk to a tax professional to better understand these I Bond nuances.

Are I Bonds A Good Investment?

I bonds are fully backed by the government, making them a safe investment for the most part. As with any type of investing, you are not guaranteed to make money and are accepting a certain amount of risk with each investment. Bonds in general tend to be less risky than other forms of investing, like purchasing stocks.

What Is The Current I Bond Rate?

I bonds issued between May 2023 and October 2023 will earn a 4.30% composite rate for the first 6 months. The composite rate is a combination of the fixed 0.90% rate of return and the 3.38% rate of inflation. The rate of return has varied over time, as detailed on the U.S. Treasury website.

Pros And Cons Of I Bonds

Before you decide whether purchasing I bonds fits your portfolio, consider some of the pros and cons.

Pros

• Guaranteed: I bonds are guaranteed and backed by the full faith of the U.S. government and their redemption value will not decline.
• Pegged to inflation: Interest rates of I bonds aim to protect your investment from inflation. You may even earn higher interest than certificates of deposit (CDs) and savings accounts.
• Beat back taxes: You do not have to pay local and state taxes on I bonds – just federal taxes.

Cons

• Limited investment: You can only purchase up to $10,000 in I bonds annually.
• Restrictions: You can't redeem I bonds until you've had them for one year, and if you redeem them before you hold them for five years, you'll pay an interest penalty.
• Federal taxes: You must pay federal income taxes on your I bonds, though you will not pay state or local taxes.

How To Buy I Bonds

Buying I Bonds is relatively straightforward and can be done online.

1. Choose your account type.

First, visit TreasuryDirect.gov. Choose whether you want to set up an individual or entity account. If you plan to buy through an entity, choose the type of entity, from a business or organization to an estate or trust.

2. Fill out personal information.

Fill out the account owner information, including your address, taxpayer identification number (either your Social Security number or employer identification number (EIN)) and contact information. Also submit your bank information, including routing number and account number.

3. Choose a password.

The prompts will lead you to choose a password, password reminder, personalized image, caption and security questions. When you log into your account, you'll provide an account number and password. You'll get an email with a one-time passcode and further instructions.

4. Select your investment.

Choose the type of security you want to purchase. In this case, you'll choose "bond." Review the purchase information and decide whether you want to schedule a reinvestment when your security matures. Then, review your transaction and authorize it.

The Bottom Line

Series I savings bonds, issued by the Department of the Treasury, can protect you from inflation because you earn a fixed interest rate and a rate that changes with inflation, known as your composite rate.

It’s wise to compare I bonds to other investment types that might offer monthly interest payments, such as high-yield savings accounts or other options. Also consider talking with a financial professional to determine your risk tolerance and goals. If you decide I bonds are a good fit, you can visit TreasuryDirect.gov to start your transaction.

Ready to track your spending, bills and net worth? Sign up with Rocket Money℠.