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.
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:
Jointly Filed Tax Return
Custodial Account – Child #1
Custodial Account – Child #2
Custodial Account – Child #3
Custodial Account – Child #4
For illustration purposes only
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.
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
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.
5, 10 and 30 years
After 12 months
After 12 months
Annual Purchase Limit
Buy and Sell
Federal tax only
Federal tax only
Federal tax only
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.