What you may want to know about Series I savings bonds, also known as “I-bonds”:
- I-bonds are designed to protect an investor’s savings from inflation risk and loss of purchasing power. Unlike most other bonds, I-bonds pay a coupon that adjusts for inflation.
- The initial interest rate through October 2022 on new Series I savings bonds is 9.62 percent. The coupon of an I-bond equals the sum of its fixed rate and the current inflation rate. The fixed rate, set by the Treasury, is loosely linked to Fed Funds and money market interest rates and remains constant throughout the bond’s life. The inflation rate is equal to CPI and resets every six months. Inflation rates reset in May and November, but the coupon of I-bonds changes at varying times depending on the purchase month. More on how I-bonds work - Series I Savings Bonds Rates & Terms.
- Whereas most bonds pay holders a semi-annual coupon payment, I-bonds compound the coupon payments into their principal values. For example, if you purchase $1,000 of an I-bond with a 5% coupon, the bond’s principal value will increase to $1,050 at the end of year one. At the end of year two, and assuming the coupon remains at 5% in the second year, you receive 5% on the new principal value of $1,050, not the original value of $1,000 like most bonds.
- I-bonds are taxed at the federal level but are not taxable on a state level. I-bond interest can be deferred until the I-bond is sold or matures.
- I-bonds have a 30-year maturity but can be redeemed any time after the first year. A penalty of the last three months of interest is applied if I-bonds are redeemed after the first year and before sixth year.
- An individual can purchase a maximum of $10,000 of I-bonds per year. An individual can purchase an additional $5,000 of I-bonds per year using a federal tax refund. The trustee of certain trusts, like a revocable living trust, can also purchase I-bonds per these limits. A parent or other adult custodian may open for a child a Treasury Direct account that is linked to the adult's Treasury Direct account.
- I-bonds are bonds issued by the U.S. Treasury, can be purchased in $25 increments, and must be purchased directly at gov.
- An individual can elect to have I-bonds in electronic form and avoid the risk of holding a physical bond. However, if a federal refund is used to purchase, delivery of the bond must be as a physical “paper” bond.
Should you purchase I-bonds?
The decision to buy an I-bond today presents a unique opportunity. If you have some cash you don’t need access to for a while, check out I-bonds to protect the purchasing power of your cash. You can capture a high annualized yield of 9.62% for the next six months. After that, the yield will float with Consumer Price Index. In that time frame, that yield will likely greatly exceed the interest rate your bank is paying you on your savings accounts.