Series I Bonds: Rates, Risks, Taxes Explained

What Is a Series I Bond?

Series I Bonds, also known as I Bonds, are a type of savings bond issued by the U.S. Treasury. They offer a unique combination of safety and protection against inflation. These bonds are considered among the safest investments as they are backed by the full faith and credit of the United States government.

I Bonds earn interest through a fixed rate that remains constant throughout the bond’s life and a variable inflation rate adjusted twice a year based on changes in the Consumer Price Index (CPI).

Most I Bonds are issued electronically, but paper certificates can be purchased with a minimum of $50 using your income tax refund, according to Treasury Direct.

Key Takeaways

• A Series I Bond is a non-marketable, interest-bearing U.S. government savings bond.
• It offers investors a return plus inflation protection and is considered low-risk.
• The bonds cannot be bought or sold in secondary markets.
• I Bonds have a fixed interest rate for the bond’s life and a variable inflation rate adjusted every May and November.
• The bonds have a 20-year initial maturity with a 10-year extended period, totaling 30 years.

Understanding Series I Bonds

Series I Bonds are non-marketable bonds within the U.S. Treasury savings bond program, designed for low-risk investments. They cannot be bought or sold in secondary markets. The bonds earn a fixed interest rate for up to 30 years, along with a variable inflation rate adjusted semiannually based on the non-seasonally adjusted Consumer Price Index for all urban consumers (CPI-U). This provides protection from the effects of inflation.

The fixed-rate component of the bond is determined by the Secretary of the Treasury and remains constant throughout the bond’s life. The variable rate is announced semiannually in May and November and is based on changes to the CPI.

The interest paid on Series I Bonds is variable, making it difficult to forecast the bond’s value in the future.

How to Calculate Series I Bonds

The actual rate on the bond, known as the composite rate, is calculated by combining the fixed and inflation rates. The minimum interest rate on an I Bond is 0%. The formula for calculating the composite rate is:

Composite rate = fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)

For example, if the fixed rate is 0.30% and the semiannual inflation is -2.30%, the composite rate on the bond will be -4.31%. However, since it is negative in this case, the composite ratio will be adjusted to 0%.

5.27%

Are I Bonds Good Investments?

Series I Bonds Pros & Cons

• Essentially risk-free
• Inflation protection
• Tax-exempt interest for state, local, and potentially federal taxes if used for education
• Limited liquidity
• Purchase limits and restrictions
• Low-interest rate compared to riskier investments

Series I Bond Benefits

One significant benefit of Series I Bonds is their low risk as they are backed by the U.S. government. They also protect purchasing power against inflation due to the variable interest rate based on the CPI. The interest earned on these bonds is often exempt from state and local taxes, with potential federal tax exemptions for education expenses.

Series I Bond Drawbacks

Drawbacks include the relatively low-interest rate compared to riskier investments, limited liquidity, and purchase limits. I Bonds must be held for a minimum of one year before they can be redeemed, and redeeming them within the first five years incurs a three-month interest penalty. Additionally, the annual purchase limit may be restrictive for investors.

Series I Bonds and Interest Income

Interest income for Series I Bonds is taxable at the federal level but exempt from state and local taxes. The interest is added back to the bond’s value and earns interest on interest. Taxes can be applied either when the bonds are redeemed (cash method) or annually on the earned interest (accrual method). The interest may be tax-free at the federal level if used for higher education.

Series I Bonds vs. Series EE Bonds

Series I Bonds and Series EE Bonds are both low-risk, U.S. government-backed savings bonds, but they differ in how their interest rates are determined and their other features.

Interest Rates and Returns

I Bonds have a combination of a fixed rate and a variable inflation rate, protecting against inflation. EE Bonds have a fixed interest rate for the bond’s life, and if held for 20 years, they double in value.

Purchase Limits and Denominations

I Bonds have an annual purchase limit of $10,000 electronically and $5,000 in paper form. EE Bonds have the same annual purchase limit electronically, with no additional purchase limit for paper bonds. Denominations for I Bonds start at $25, while EE Bonds range from $25 to $10,000.

Maturity and Redemption

Both I Bonds and EE Bonds have a 30-year maturity composed of an initial 20-year period followed by a 10-year extended period. Both bonds must be held for at least one year before they can be redeemed, and redeeming within the first five years incurs a three-month interest penalty.

Tax Benefits and Use Cases

I Bonds and EE Bonds both offer tax benefits, with interest exempt from state and local taxes and potential federal tax exemption for education expenses. I Bonds provide protection against inflation, making them attractive during periods of high inflation. EE Bonds guarantee a doubling in value after 20 years, appealing to long-term investors seeking predictable returns.

Where Can I Buy Series I Savings Bonds?

Series I Bonds can only be purchased online from the U.S. Treasury through the TreasuryDirect website. They can also be purchased using a federal tax refund.

How Much Money Can I Make with an I Bond?

If an investor purchases $10,000 worth of I Bonds at a composite rate of 5.27%, the interest earned in the first year would be approximately $535. It’s important to note that the composite rate can change every six months, affecting the actual interest earned.

What Tax Form Do I Need to Fill Out If I Purchase U.S. Series I Savings Bonds With My Tax Refund?

If you purchase U.S. savings bonds with your tax refund, you need to complete and file IRS Form 8888 along with your tax return. The IRS will arrange for the bonds to be mailed to you.

What Has Been the Historical Interest Rates for Series I U.S. Savings Bonds?

The historical interest rates for I Bonds depend on their issue date and the experienced inflation rates. Consult a table showing the historical fixed and variable components for accurate information.

How Long Does It Take for a Series I Bond to Mature?

Series I Bonds have a 30-year maturity, with a 20-year original maturity followed by a 10-year extended maturity period.

The Bottom Line

Series I Bonds offer a unique investment opportunity for risk-averse investors looking for low-risk, inflation-protected options. The bonds’ fixed and variable rates help preserve purchasing power over time. However, there are limitations, such as purchase limits, minimum holding periods, and penalties for early redemption. While I Bonds provide competitive returns during high inflation, they may not have the same growth potential as stocks or real estate. Investors should consider their financial goals and risk tolerance before including I Bonds in their portfolios.