Key Takeaways
- You can buy electronic I bonds online at TreasuryDirect.gov, or you can submit paperwork with your federal tax return to buy paper I bonds.
- I bonds offer stable returns, low risk and tax benefits. However, you can find higher returns with other investments, and you must hold I bonds for a specific period.
- The current I bond rate is 4.28% -- lower than some of the best high-yield savings account and CD rates.
With inflation in the headlines for the past few years, you might want to consider adding I bonds to your portfolio. These government-issued bonds are designed specifically to keep pace with inflation with an interest rate that adjusts every six months based on the rate of inflation.
But that doesn’t necessarily mean they’re the right fit for you. Today’s I bond rate is 4.28% -- less than half the 9.62% that turned so many heads in 2022 and lower than what some other low-risk savings options are paying right now.
As inflation continues to cool and bond rates tick into normal territory, it can be tough to decide between I bonds and other saving options like CDs. Here’s what you need to know about how I bonds work and what to consider before you buy them.
How do you buy I bonds?
The easiest way to buy I bonds is at TreasuryDirect.gov. You’ll need to create an account by providing your Social Security number and other information and linking a bank account to pay for the purchase.
You can also use your tax refund to buy paper Series I bonds. This process isn’t nearly as simple, but it does increase the total amount you can spend on the bonds. The government caps I bond purchases at $10,000 a year but allows an additional $5,000 in paper I bond purchases. If you want to take this route, download IRS Form 8888.
What are I bonds?
I bonds are issued by the US government with the purpose of protecting your money from inflation. For example, if you put $100 in an envelope last January and it’s still gathering dust, it’s now worth less. Why? Because when inflation is rising, the value of the dollar decreases over time. I bonds earn interest that helps your savings keep pace with the rising cost of living.
Here’s a rundown of some important details to know about I bonds:
I bonds earn two interest rates. I bonds have a fixed rate and a variable inflation rate that combine to deliver the composite rate. When you buy your I bond, the fixed rate will stay the same until you cash it out. (Right now, it’s 1.30%.) The government bases the inflation rate on the Consumer Price Index, which measures the average change in the prices paid by urban consumers for a basket of goods and services.
Rates are set twice each year. On May 1 and Nov. 1, the government announces new fixed and inflation rates. For example, on May 1, 2024, the government announced a fixed rate of 1.30% for all I bonds issued over the next six months and an inflation rate of 1.48%. Based on that information, the Treasury Department used a complex formula to calculate a composite rate of 4.28%.
Your rate changes based on when you buy the bond. While the government announces new rates in May and November, your rate changes every six months from the date you buy the bond. This rate change will always take place on the first of the month. So, if you buy a bond anytime in March, your rate will change every Sept. 1 and March 1. If you buy a bond anytime in October, your rate will change every April 1 and Oct. 1.
The US government guarantees the investment. This is one of the biggest selling points of I bonds. While corporate and municipal bonds can carry some risks, the backing of the federal government protects your money against risk or hacks, and guarantees the return of the bonds’ principal and interest.
You’ll pay taxes on the interest, but only at the federal level. Interest earned on I bonds is only subject to federal taxes, and those taxes are deferred until the year you redeem the I bond. That could be an important consideration for higher-income investors in high-tax states, according to Elliot J. Pepper, financial planner and director of tax at Maryland-based Northbrook Financial.
You can’t buy an infinite amount of I bonds. I bond purchases are capped at $10,000 per year per Social Security number, although you can buy an additional $5,000 of bonds with your tax refund. You need to invest a minimum of $25 in electronic I bonds or $50 in paper I bonds.
You can’t cash in the bond for a while. The minimum holding period for an I bond is one year, but even then, you’ll wind up forfeiting some of the interest. If you cash in the bond in less than five years, you’ll lose the last three months of interest. The full term of an I bond is technically 30 years.
Are I bonds a good investment?
If you’re trying to figure out whether I bonds make sense for your portfolio, there isn’t a universal yes or no answer. There are pros and cons to consider, depending on your particular investing goals.
Pros
Long-term value: “Over time, an I bond will maintain the purchasing power for the investor who bought it,” said Pepper. That’s especially helpful for a low-risk investor or someone nearing retirement, he said.
Stability: I bonds are considered safe investments since they’re backed by the government and not volatile like investing in stocks.
State tax benefits: You won’t pay taxes on interest from I bonds on your state income taxes, which can be a nice selling point compared with CDs and savings accounts. Plus, your taxes on earnings at the federal level don’t hit until you actually cash in the bond.
Cons
Lower returns: Some experts note that you’ll get significantly higher returns over time by investing in stocks. “I bonds should never be a substitute for investing long term in the stock market,” said Casey T. Smith, president of Georgia-based Wiser Wealth Management.
Penalty for cashing out early: You won’t get access to interest until you cash the bond or until maturity. And if you cash in the bond before the five-year anniversary, you‘ll lose the last three months of interest you earned.
Extra hassles: It might be an easier process to shop for a high-yield savings account, Smith said. Many have annual percentage yields above 5% and are backed by the government via FDIC insurance, but they don’t have the same holding period restrictions as I bonds, he said.
Understanding I bonds vs. EE bonds
If you’re thinking about I bonds, you may want to also consider the government’s other option: EE bonds. These hold quite a few similarities with I bonds, but there is one notable difference -- the government guarantees that an EE bond will double in value in 20 years.
That may sound promising, but it’s important to square that doubling with the potential for inflation to impact what that’s really worth. For reference, EE bonds are currently paying 2.70% interest, far short of the 4.28% attached to I bonds.
Is now a good time to buy I bonds?
At the midway point of 2024, I bonds aren’t looking all that appealing. Some banks and credit unions are paying higher rates on high-yield savings accounts, money market accounts and CDs, and all of these options have significantly looser strings attached than the five-year threshold you must meet with I bonds to avoid losing any interest.
Don’t expect I bond rates to go up, either. While no one knows when the Federal Reserve will cut rates, most experts believe at least one cut will happen this year. When it does, expect I bond rates -- along with other savings rates -- to fall.
The safety of I bonds makes them a good choice if you have a very low risk tolerance. So, if you’re nearing retirement, I bonds may make a good addition to your portfolio since they’ll preserve your purchasing power. If you’re young and looking to grow your money at a faster rate, however, I bonds won’t do the trick. You’re better off focusing on more aggressive investments while keeping your liquid funds in a high-yield savings account or building a CD ladder.
Where and how to buy I bonds
The most convenient way to buy I bonds is at TreasuryDirect.gov, the government’s site for buying and managing federal savings bonds. It’s a fairly simple process.
1. Create an account
Be prepared to share your Social Security number, your address and the account and routing number of the bank account you plan to use to fund the purchase.
2. Watch for a confirmation email
You’ll receive your full account number and one-time code to verify your account.
3. Login and buy your bonds via BuyDirect
If you want to get a bond for someone else -- a child, for example -- you’ll need to make sure you include who has access to cash it in.
Can you still buy paper bonds?
If the online experience isn’t your cup of tea, the government still offers one old-school, paper-based approach to buying I bonds (EE bonds are all digital).
You can buy paper I bonds in $50 increments when you file your federal taxes. You’ll need to inform the IRS that you plan to use part of your refund to buy the bonds, which you can do with IRS Form 8888. You’re capped at a maximum amount of $5,000 this way.
The bottom line
I bonds can be a good low-risk addition to your investment portfolio, but there are quite a few other savings products -- such as high-yield savings accounts and CDs -- that pay more competitive rates right now. Shop around, and think carefully about your investment goals and timeline to find the best place to put your money.