I Bonds Explained

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 is updated every six months (in May and November).

I bonds are non-marketable, meaning you cannot 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 credit of the U.S. government, they have no credit risk and are said to be among the safest types of investments you can make. 

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 the Treasury. You may purchase up to $15,000 worth of I bonds per year – $10,000 worth of electronic I bonds and $5,000 worth of paper I bonds. Paper bonds can only be purchased with an IRS tax refund. 

The current composite rate for I bonds is 5.27%. This rate is locked through April 2024, 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 Jan. 1, 2024, the composite rate of 4.30% would apply through July 31, 2024.

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

Composite Rate = Fixed Rate + (2 x Semiannual Inflation Rate) + (Fixed Rate x Semiannual Inflation Rate)

Composite Rate = 0.0090 + (2 x 0.0169) + (0.0090 x 0.0169) = 0.0429 or 4.30%

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

When Do I Bonds Pay Interest?

Typically, bonds pay interest every six months. 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, 2023, you purchase $10,000 of electronic I bonds.
• The composite rate of the bonds you purchase is 4.30%.
• You intend to hold onto the I bonds for a long time and earn as much interest as possible.
• The composite rate of 4.30% will apply for six months from the date of purchase.

Based on the information above, you can expect to earn $35.83 per month ($10,000 × 0.0430 ÷ 12 = $35.83) for the first six months you own the bonds, which is August 2023 through January 2024. This means that for the first six-month period, you’ll earn $215 in interest, which makes your total investment worth $10,215.

Now, let’s say that in October 2023, 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 6.00%. This adjusted rate applies to any bond purchased or rolling into a new semiannual period between Nov. 1, 2023, and Apr. 30, 2024.

Since your I bond will enter into a new semiannual period on Feb. 1, 2024, 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 $10,215 – not your initial investment of $10,000.

You can expect to earn $51.08 per month ($10,215 × 0.060 ÷ 12 = $51.08) from February 2024 to July 2024, for total earnings of $306.45 for that six-month period. Now, the total value of your investment has grown to $10,521.45 ($10,215 + $306.45 = $10,521.45).

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

More: I Bonds vs. CDs: Which Makes More Sense?

How To Buy I Bonds

You can invest in I bonds by purchasing them directly from the U.S. Department of the Treasury via TreasuryDirect: a web portal that allows you to buy, manage and redeem electronic government savings bonds online. To create an account, all you need to do is 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.

I bonds are a stable investment option if you want something to offset any potential loss in your portfolio. Contact a financial professional to see if I bonds would be a good idea for your investment goals.

Timothy Li, MBABusiness Finance Manager

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.

Can You Buy I Bonds at a Bank?

You cannot buy I bonds at a bank or through a brokerage account. There are only two ways to buy I bonds: either electronically via the TreasuryDirect.gov portal or in a paper format using your tax refund. 

To buy paper I bonds, use IRS Form 8888 to specify how much of your refund should go to savings bonds and how much to you directly (by a check or direct deposit to your bank account). On Form 8888, you also need to specify who will own the bonds (in the event you are buying them as a gift for someone else).

I Bonds vs. Other Investments

I bonds are a good investment option for people with a low tolerance for credit risk, inflation risk and/or the ability to endure some illiquidity. However, they are not ideal for everyone. There are a few scenarios where other investment options can make more sense:

• If you want to earn a competitive interest rate, but are uncomfortable with being exposed to any degree of illiquidity or price volatility, a high-yield savings account is a sensible option – especially if you are comfortable with online banking.
• If you are a conservative, fixed-income investor that wants more yield and believes inflation will continue to moderate, consider putting your money into other investment-grade bonds, such as high-quality corporate securities, municipals and mortgage-backed securities. An index fund that tracks the Bloomberg Barclays Agg could be a sensible option.
• If you have a long investing horizon and desire to accumulate wealth, consider putting your money into stocks. These financial securities offer you the chance to participate in the long-term success of a publicly-traded company (or a group of publicly-traded companies).

That said, Annuity.org does not advocate one-off stock purchases. Rather, our experts recommend you invest in stocks in a diversified manner. An ideal way to do so is via low-cost, fund-style vehicles, such as index funds and exchange-traded funds.

I Bonds Pros and Cons

As previously 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 solid risk-adjusted return.

That said, I bonds do have some disadvantages, including their one-year liquidity lock-up and five-year early redemption penalty. For investors with long horizons, I bonds can also fail to deliver the returns offered by growth-oriented assets, such as stocks.

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

As you evaluate this investment opportunity, be sure to take a balanced approach. Also, remember that the economic environment is always in a state of continuous change. Given today’s relatively high inflation, I bonds can make sense to invest in – but they may not be as attractive if inflation declines.

Frequently Asked Questions About I Bonds

Editor Malori Malone contributed to this article.