What Are the I-Bonds and Why Should You Invest? A Complete Guide on Series I US Saving Bonds

Inflation is a major concern for many people and so they want to take steps to protect their savings. One way to do this is by investing in Inflation Bonds (I-Bonds), which are US government-issued inflation-protected securities that have interest rates that increase as inflation goes up.

I-Bonds are a safe and low-risk investment, and they offer a number of benefits. In this article, we'll discuss how to invest in I-Bonds — but not before explaining what exactly they are, and why you should invest in them. 

So if you're interested in getting more information about this investment option and how it can help you reach your financial goals, read on!

What are I-Bonds?

I-Bonds are non-marketable U.S. Treasury securities with combined fixed and variable interest rates and a maturity date of at least 12 months or a maximum of 30 years. 

if i bonds are safe
I-Series US Treasury Bonds

I-Bonds offer investors two main benefits: tax deferral and inflation protection. When you invest in an I-bond, you're allowed to defer federal taxes on your investment until it is redeemed — even if you don't sell it for five years or longer. This means that even if you do not need the money for retirement, you can still benefit from this tax break. 

In addition, when you buy a US savings bonds value of $10,000 or less, your interest payments will be exempt from state and local taxes. This tax break alone makes savings bonds worthwhile for investing for business owners, families, and individuals. 

However, there are other benefits that guarantee that savings bonds is a good investment for you. They are backed by the full faith and credit of the U.S. Treasury — meaning they’re guaranteed to be repaid in full at redemption.

As they mature, savings bonds also become more valuable: The face value increases to match inflation until it reaches its maturity date.

Understanding I-Bonds: How Do They Work?

Here’s how I-Bonds work.

When you buy an I bond, you earn a fixed interest rate for the term of your bond. You also receive a variable interest rate that is adjusted every six months based on the Consumer Price Index (CPI) — which measures the current inflation rate. 

When you sell the bond back to the US Government on maturity, you redeemed the full amount of your initial investment plus the accrued interest over the life of the bond. Essentially, there are two things you should note when investing in an I-Bond Series:  

1. Earning Interest

The interest rate paid on an I-Bond investment comprises two parts. First is the fixed rate, which is the portion that remains constant for the life of the bond and does not change with time. It is set by the Treasury Department at the start of your investment.

The second component is a variable interest rate, which is based on the current inflation rate, and is recalculated semiannually (every six months). . This interest rate changes based on the performance of the economy, and is designed to protect your investment against inflation. 

This means that your earnings on the savings can change over time, depending on the inflation rate. For example, if the current variable interest rate is 0.50%, it means your I-Bond will earn 0.50% interest in addition to the fixed rate.

2. Redeeming accrued interest

Interest on an I-Bond is accrued during the holding period, but it's not paid directly to the investor. Instead, the interest is added to the bond's principal, which is paid out when the bond matures. This means that the investor will earn interest on their investment, even if they don't receive any payments during the holding period.

The Series I US Savings Bonds are great for investors who want both a high return and some stability when it comes to their investments. In addition to the guaranteed interest rate, these bonds offer an annual inflation protection guarantee. This means that if inflation goes up, your principal will increase as well.

This combination of stability and growth makes an I-Bonds savings strategy a good deal for many investors. They’re also perfect for people who want to build their investment over time rather than having everything at once or having no savings at all!

What are the Main Benefits?

I-Bonds are one of the best investments you can make. These bonds offer attractive returns and can help you build a nest egg for retirement.

1. High investment returns

Investing in US savings is a great way to invest your money while earning a high rate of return or to begin your retirement savings and grow it over time. They earn both fixed and variable interests on them, which means that you'll make more money when you sell them later down the road.

2. Tax benefits

State and municipal income taxes do not apply to I-Bonds. Federal income taxes do, but they’re deferred until the maturity of the bond. Nevertheless, I bonds may be completely tax-exempt if they are used to pay for qualified higher education expenses. The interest earned on bonds can be taxed each year, at maturity, or at the time the bonds are redeemed.

are i bonds a good investment right now

3. Safety of investment 

You’ve probably wondered if I-Bonds are safe. The simple answer is Yes. 

Because their value is insured by the US Government, I-Bonds are considered to be some of the safest investments available today because they can't be defaulted on or recalled unless there's an emergency with the economy or financial system at large (which isn't likely).

4. Protection from inflation

One of the most important benefits of this savings strategy is protection from inflation. To put it simply, think of I-Bonds as an investment that will not dip in value from inflation. 

In other words, if you buy a certain amount of I-Bonds at a time and hold them until maturity, you will have the same amount of money at the end of your investment period as what you started with - plus accumulated interest over the holding period. 

In addition to a variable interest adjusted every six months. I-Bond pays a fixed rate of interest each year, regardless of whether there’s a rise or fall in the Consumer Price Index (CPI). This protects your principal value against rising prices – which means that you will never lose money on an I-Bond.

Are There Any Downsides? 

There are a few potential downsides to investing in I-Bonds. 

Firstly, US saving bond interest rates are not always particularly generous. Since the interest rate and inflation both rise and fall together, it means when inflation is low, the pay will also be low.

Secondly, I-Bonds are not as liquid as some other investment options, so you may not be able to access your money as quickly or easily as you might like. Being longer-term investments, you cannot redeem them until the specified holding period has passed, which is at least 12 months. 

But, overall,  are i-bonds a good investment? Yes, especially if you are looking for a safe, long-term place to park your money.

How I Bonds Can Protect Your Money During Times of Inflation

Inflation is a common fear for people who invest in stocks and bonds.

However, because I-Bonds pay both a fixed rate and an inflation-adjusted variable rate, they protect the value of your investment from inflation. The fixed rate is set by The US Treasury Department sets the fixed rate, while the variable rate is determined by the current Consumer Price Index (CPI) and changes semiannually. 

i-bonds protect from growing inflation

In other words, with the Series I US Savings Bonds, you’re guaranteed monthly interest rates that keep up with inflation, which means they can protect your money against surges in consumer prices. 

For example, if the CPI increased from 0.1% in July to 0.5% in October, it means that $1 today now buys you less than it did at that time of the year. However, this doesn't mean that you should panic and sell your I-Bonds because of this high inflation rate; instead, think of it like a savings account where you can put away money for future expenses without worrying about losing purchasing power over time.

If you're looking for a safe place to put your money, I Bonds is an excellent option. Not only do they earn interest and guarantee the principal, but they also offer a tax-free way of saving for retirement.

Inflation is a fact of life, and when you invest in I Bonds, you're safeguarding your hard-earned money against it. With inflation on the rise, having an extra cushion of cash to fall back on is more important than ever.

EE Bonds vs. I Bonds: What is the Difference?

EE bonds and I-Bonds are two types of savings options offered by the US Treasury Department.

comparing EE bonds and I bonds

They're similar, but there are some differences between them, which are explained below.

EE BondsI-Bonds
EE Bonds are issued at a 50% discount. They may generally be bought for up to $5000 at face value. Discounts are not offered on electronic EE bonds. However, twice a year, a variable interest rate (90% of 6 months median of Treasury securities over 5 years) is applied to the bonds. - which means varying interest rates over the term of the bond. You may buy up to $10, 000 in electronic EE bonds each calendar year.The bonds are issued at face value. You can buy up to $15, 000 (comprising $10, 000 in paper and $5, 000 in electronic) per calendar year.
Only a varying interest rate is applied.  The interest rate on US savings bonds is a combination of two different rates —  The fixed rate and the inflation-adjusted variable rate, which is determined every six months.

The fixed rate is set by the Treasury Department on the first of May and November and applies to all bonds issued within six months.

Calculating the I-Bonds Interest Rate

There are two ways an I-Bond interest rate is determined — the fixed and inflation rates. Together, they’re called the composite rate. 

Evidently, the inflation rate directly impacts the set fixed rate. The Treasury Department, however, sets a limit of zero for a Series I bond, which means that series I-Bond interest rates cannot fall below that level.

The composite rate will be set at zero if inflation is so low that it would subtract more than the fixed rate. A composite rate is calculated using the formula below:

Fixed rate + (6 months inflation rate X 2) + (6 months inflation rate + fixed rate) = Composite rate. 

Let's say that the fixed rate is 0.50% and the semiannual (six months) inflation is -1.50%, the composite rate on this bond would be:

  • = 0.005 + (2 x -0.015) + (0.005 x -0.015)
  • = 0.005 - 0.03 - 0.000075
  • = -0.025075, or -2.5%.

But since the composite ratio is negative in this example, it will be adjusted to 0%.

How Do You Buy US Savings I-Bonds?

There are two ways to buy I-Bonds:

  1. If you’re looking for where to buy I-Bonds, the Treasury Direct website offers them for direct purchase online. The minimum you can buy I-Bonds online per year is $25 and the maximum is $10,000.
  2. Using your tax refund, you can apply for an additional $5000 US treasury bonds in paper form. Therefore, this decision needs to be made when filing your tax return. Online purchases cannot be made after receiving a refund.

In light of these, individuals are limited to $15,000 worth of I-Bond in a year (A married couple can buy up to $30,000), so to incorporate them into your overall savings strategy, you must plan well in advance.

More Answers to US I-Bonds Questions

When Do I Bonds Mature?

It matures when you redeem it, or a maximum of 30 years after the bond was issued, whichever occurs first.

An I-Bond has an original maturity of 20 years followed by an extended maturity of 10 years. Series I US savings bonds come with several ownership caveats:

  • I bonds are not redeemable for one year after purchase. And the prior three months of interest are forfeited when a bond is cashed during the second through fifth year after purchase.
  • When bonds are redeemed after five years, there is no interest penalty.

Do I Bonds Earn Interest Monthly? 

Yes, interest is earned monthly on I-Bonds. The Treasury Department compounds interest on your savings semiannually (every six months) and adds it to your principal. 

Therefore, your new principal is your prior principal plus the interest accrued on the I-Bond over the previous six months.  

How Are They Taxed?

I-Bonds are not subject to state or municipal taxes, but federal income taxes are paid. They may be totally tax-exempt, however, if they are used for qualified higher education costs.  

Taxation Rules for I-Bond Investors

Taxes can be paid on interest earned annually, at maturity, or upon redemption of a bond. When I-Bonds mature or are redeemed, the principal and interest are taxed.

Can You Buy I-Bonds Above the $10,000 Limit?

US Savings bonds can be purchased online for up to $10,000. Using your federal income tax return, you can purchase additional bonds worth up to $5,000.

Can They Lose Value?

A major advantage of this investment alternative is their US Government backing, which ensures they can’t lose value. This means that if you’re issued a $1,000 I-Bond investment, you're assured it would yield that exact sum plus accrued interests at maturity.

Are the I-Bonds a Low-Risk Investment Strategy? 

The best way to think of I-Bonds is as a low-risk investment strategy. They're a long-term investment that's guaranteed by the US Treasury, making them ideal for long-term investors who want to avoid risks of loss.

Should You Invest in I-Bonds Right Now?

If you’re wondering, Is it a good time to buy i bonds? Are I-Bonds a good investment right now?  Should I buy I-Bonds? 

We’d say yes, and here’s why?

With inflation rising and interest rates on other savings accounts low, I-Bonds are quite attractive right now. The current interest rate for I-Bonds stands at 9.62%, which greatly exceeds the average rate earned on a bank savings account.

Can I Purchase I-Bonds for My Child?

Yes, you can. However, note that:

  • Your child owns the money once it is purchased in their name.
  • For college-related expenses, I-Bonds in the name of the parent may qualify for favorable tax treatment, but if your child holds an I-Bond in his or her name, they will not be eligible for this preferential tax treatment.
  • If your child files for financial aid (through the Free Application for Federal Student Aid - FAFSA), their savings bond will be treated as their assets, which can adversely affect their eligibility when they attend college.

How Can We Help?

At Interactive Wealth Advisors, we understand the importance of investing in tax-advantaged, low-risk security like the Series I US Savings Bonds. That's why we've been helping clients build wealth for over 20 years.

As your reliable financial advisor in Portland, we offer a wide range of investment options that provide individuals and families with flexibility and convenience, including I-Bonds, EE Bonds, tax consulting, IRA retirement planning, and investment management in Portland, OR

Schedule a call with one of our Portland wealth management experts today if you'd like to learn how we can help you create an I-Series Bond investment strategy that protects your wealth from inflation now and in the future.

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