What are Series I savings bonds?

You might consider Series I savings bonds—also called I bonds. They’re investments issued by the U.S. Department of the Treasury that have a combined fixed and inflation interest rate—known as a composite rate. 

I bonds are designed to offer consumers protection against inflation. And because these bonds are backed by the federal government and their value can’t decline, they’re considered to be low-risk investments.  

Key takeaways

• I bonds are federal bonds designed to protect investments from inflation.
• I bonds earn interest at a rate that is adjusted twice a year to respond to inflation.
• You’re allowed to purchase up to $10,000 in electronic I bonds each calendar year and an additional $5,000 in paper I bonds.
• You have to use your IRS tax refund to purchase paper I bonds. They can be purchased in $50 increments.

I bonds are nonmarketable, which means they aren’t sold on the secondary market and can only be purchased directly from the Treasury Department. I bonds earn two different types of interest: 

• The fixed rate is set each May and November and applies to all bonds sold in that six-month period. The fixed rate remains the same for the life of the bond. 
• The inflation rate, on the other hand, is variable and tied to inflation. When the inflation rate goes up, so does the combined rate of the bond. And when inflation goes down, the rate follows. The bond’s inflation rates reflect changes in the consumer price index, which is used to measure inflation in the U.S. economy. While this means the bond’s interest rate can go up and down, the Treasury Department guarantees the bond rate won’t fall below zero. 

I bonds and compound interest

I bonds earn compound interest. So a bond starts earning interest in the first month, and every six months, the interest earned on the bond is added to the principal or the initial purchase amount. The bond then takes on a new value: the initial purchase amount plus the interest earned. And that new value then earns interest for the next six months. 

What is the fixed rate on I bonds?

The fixed rate is reevaluated every six months. You can check TreasuryDirect.gov for any changes.

I bonds mature after 30 years. Bonds bought after 2003 can be cashed in anytime after a year. But if you do so before five years, you lose the most recent three months of earned interest. For example, if you cash in your I bond 24 months after purchasing it, you would keep 21 months of interest.

To buy I bonds, you must be at least 18 years old, have a Social Security number and be either a U.S. citizen, a U.S. resident or a civilian employee of the U.S. government. 

You can buy I bonds directly from the Treasury Department. You can also have your employer send part of your paycheck directly to the Treasury. For both options, you’ll receive electronic I bonds, which are held in a Treasury account.

You can buy up to $10,000 in electronic I bonds per calendar year, plus an additional $5,000 in paper I bonds if you use your tax refund. 

Using your tax refund to purchase I bonds

You’re allowed to buy up to $5,000 in paper I bonds, in addition to the $10,000 in electronic I bonds, when you use your tax refund.

To purchase paper I bonds, use IRS Form 8888 to specify how much money should be used to purchase bonds and how much you’d like to keep as a refund. Paper I bonds are available in $50 increments, up to the limit of $5,000. If you only use a part of your refund, you can choose to have the IRS deposit the remaining amount into your bank account or receive a check by mail.

Registering I bonds

Electronic and paper I bonds must be registered to a name when they’re purchased. Besides buying I bonds for yourself, you can register them in another person’s name as a gift. To register a bond to another person, they must have a Social Security number and meet the requirements for purchasing I bonds.

I bond interest is subject to federal income tax but exempt from state and local income tax. These bonds are also subject to federal estate, gift and excise taxes, as well as state-level estate or inheritance taxes.

Interest isn’t paid until the bond matures. You can choose to either pay taxes annually as the interest accrues or pay taxes on the total amount of interest when you cash in the bond. 

Using I bonds for higher education 

Under certain circumstances, you can use I bonds to pay for higher education and avoid paying federal taxes on the interest. There are regulations, but you could qualify for a tax exclusion if:

• You were at least 24 years old when the bond was issued to you, and the bond was issued after 1989.
• Your modified adjusted gross income is less than the current IRS limit. Keep in mind, the limit changes annually and is available on IRS form 8815. 
• You cashed in your savings bonds in the same tax year that you’re seeking the exclusion.
• You paid qualified higher education expenses to an eligible institution in the same tax year.
• Those expenses were for you, your spouse or one of the listed dependents on your federal income tax return.
• You file your return under any status other than married, filing separately.

If you’re considering buying I bonds for your child, the Treasury Department advises registering them in your name. But it’s a good idea to consult a tax expert for more information.

If you’ve been considering Series I bonds, you may have heard about a similar bond offered by the U.S. Department of the Treasury: Series EE bonds. Like I bonds, EE bonds also feature semiannual compounding interest. The major difference is that EE bonds have a fixed interest rate for at least the first 20 years of the bond. And guidance on TreasuryDirect guarantees that an EE bond will double in value 20 years after you purchase it.

I bonds are considered low-risk investments since they’re backed by the federal government and their value can’t decline. They earn interest at a composite rate that is adjusted twice a year to respond to inflation.

You can purchase I bonds from the Treasury Department, but there are certain requirements involved, like having a Social Security number and being at least 18 years old. And if you’re interested in exploring bonds, you can learn more about how they work and other types of bonds.