I Bonds are U.S. savings bonds that earn interest based on a combination of a fixed rate and an inflation rate.
Introduction to I Bonds
First issued in 1998, I Bonds, also known as Series I Savings Bonds or Inflation Bonds, are U.S. savings bonds that have an interest payment tied to a fixed rate plus a variable inflation rate (fixed + variable).
This composite rate adjusts every six months in May and November based on the Consumer Price Index, which is a common measure of inflation.
These bonds pay interest for 30 years unless you redeem them early. You cannot sell inflation bonds for one year after initial purchase and there is a a small, early withdrawal penalty if you sell before five years (interest from previous three months).
I Bond Rates
With U.S. interest rates at all-time lows it’s hard to find investment yield without stepping up your risk. Said another way, where can you safely park some cash and still get a decent return?
Well, if you’re looking for value (risk / return) then there is no better value in the market today than series I savings bonds. From a risk / return perspective I Bonds are the best value going right now.
Right now the fixed rate on inflation bonds is 0%, but the variable rate based on inflation is 3.56% semiannually, bringing the combined composite rate to 7.12% (0% + 7.12%). Here is a comparison of similar investment vehicles and the current, average rates of return.
| Instrument | Current Rate |
| I Bonds | 7.12% |
| Corporate Bonds | 2.49% |
| 30 Year Treasury | 1.75% |
| Municipal Bonds | 1.70% |
| 5 Year Jumbo CD | 0.27% |
| Money Market | 0.07% |
| EE Bonds | 0.10% |
| Savings Account | 0.06% |
| TIPS | -0.50% |
How do You Buy I Bonds?
The only way to buy I bonds is directly from the U.S. Department of the Treasury at TreasuryDirect.gov. You can purchase them individually or through an entity like a trust or LLC. You can also purchase them as gifts for adults 18 and older or children through a custodial account.
All series I savings bonds that are purchased directly are delivered and held in electronic form. The only way to purchase a paper I bond is through your tax return.
Min Investment – You can purchase as little as $25 in digital I Bonds or $50 in paper I bonds.
Max Investment – You can buy up to $10,000 in digital I bonds per person, per calendar year. You can also elect to buy up to $5,000 in paper bonds using your federal tax return.
Further, you can purchase $10,000 per person in I bonds as gifts. The purchase amount of a gifted bond counts toward the annual limit of the recipient, not the giver. So, in a calendar year, you can buy up to $10,000 in electronic bonds and up to $5,000 in paper bonds for each person you buy for. Let’s break this down with a simple example:
| Buyer | Annual Limit |
| Husband | $10,000 |
| Husband’s Trust | $10,000 |
| Wife | $10,000 |
| Wife’s Trust | $10,000 |
| Jointly Filed Tax Return | $5,000 |
| Custodial Account – Child #1 | $10,000 |
| Custodial Account – Child #2 | $10,000 |
| Custodial Account – Child #3 | $10,000 |
| Custodial Account – Child #4 | $10,000 |
| Total | $85,000 |
So a married couple with four children could purchase up to $85,000 per year if they each had a trust account. Obviously the amount you invest depends on your personal situation.
Pros and Cons of I Bonds
Look, there’s no such thing as 100% risk-free, but U.S. backed treasuries and savings bonds are about as close as you can get. With a lot of speculation and uncertainty in the markets today, you might be hard-press to find investment opportunities that are safe and provide a decent yield.
With interest rates at all-time lows and inflation worries lurking around every corner, inflation bonds are the perfect balance of risk and return.
Pros
- High yield interest rate (currently 7.12%)
- Easy to buy
- Low-risk product that helps protect your savings from inflation
- No state or local income taxes
- If you use the money for higher education, you may be able to avoid part or all of the federal taxes
Cons
- Limit to how much you can purchase each year
- Variable interest rate will drop with lower inflation
- You must hold the bond for at least 12 months before redeeming it
- If you redeem an I bond before five years, you’ll owe a penalty worth the interest of the previous three months
I Bonds vs EE Bonds vs TIPS
If you visit TreasuryDirect.gov you will see several investment options other than I bonds. Two of the most commonly purchased are EE Bonds and TIPS.
Series EE savings bonds, or EE bonds for short, are low-risk savings products that pay interest until they reach 30 years or you cash them, whichever comes first. The biggest difference is that they use a fixed interest rate.
Treasury Inflation-Protected Security (TIPS) differ from I bonds and EE bonds in that they have a variable interest rate tied to the CPI that also adjusts the principal amount. TIPS are also available on the secondary bond markets, whereas I savings bonds and EE bonds are bought and sold exclusively through TreasryDirect.gov.
| Instrument | I Bonds | EE Bonds | TIPS |
| Interest Rate | Composite | Fixed | Variable |
| Term | 30 years | 30 years | 5, 10 and 30 years |
| Redemption | After 12 months | After 12 months | 45 days |
| Annual Purchase Limit | $10k | $10k | $5mm+ |
| Buy and Sell | Non-Marketable | Non-Marketable | Marketable |
| Tax Implications | Federal tax only | Federal tax only | Federal tax only |
Summary
Hopefully by this point it’s clear how great the current opportunity in I Bonds is. There is no crystal ball that will determine what inflation will do over the next 12-36 months, but if consumer prices continue to rise, series I savings bonds will continue to provide a great return. And if inflation subdues and fall in line with historical trends, you can always sell your I bonds and put your hard earned money into something else.