Series I Savings Bonds, Part 1: An Attractive Investment Option Explained

Series I Savings Bonds, Part 1: An Attractive Investment Option Explained

May 14, 2024

Series I Savings Bonds (commonly referred to as “I Bonds”), issued by the U.S. Government through Treasury Direct , are a popular investment choice for many individuals looking to secure their savings against inflation while enjoying a government-backed guarantee. These bonds offer a blend of relatively high interest rates (compared to most bank accounts), safety, tax advantages, and inflation protection, making them an attractive option for conservative investors.

 What Are I Bonds?

I Bonds are a type of U.S. savings bond designed to protect against inflation. These bonds earn interest through a combination of a fixed rate and a variable inflation rate. The inflation rate adjusts every six months based on changes in the Consumer Price Index for all Urban Consumers (CPI-U). This structure ensures that the bond’s earnings keep pace with inflation, providing a stable yet flexible return on investment.

 The interest paid on an I Bond is a blend of two rates:

  1. Fixed Rate: This rate is determined at the time of the bond's purchase and remains the same throughout the bond's life.
  2. Inflation Rate: Adjusted semiannually on May 1 and November 1, this rate reflects changes in the CPI-U. It ensures that the bond’s yield reflects current economic conditions, particularly inflation trends.

Even if the inflation rate turns negative, the interest rate for an I Bond will never be lower than zero or the fixed rate, whichever is higher. 

For I bonds issued May 1, 2024, to October 31, 2024, the current combined interest rate is 4.28%. This rate will last for six months from the time of purchase. Interest is compounded semiannually, which means the bond’s earnings are added to its principal value every six months, allowing interest in the subsequent period to be calculated on the increased principal.

Benefits of Investing in I Bonds

  • Inflation Protection: As inflation increases, so does the interest rate on I Bonds, which helps guard your investment against the erosion of purchasing power from inflation.
  • Tax Advantages: I Bonds are exempt from state and local taxes, and federal taxes can be deferred until you redeem the bond or it matures. Additionally, if used for qualified educational expenses, the interest may be entirely tax-free.
  • Security: I Bonds are backed by the U.S. government, making them a solid choice for conservative investors. 

Purchase and Redemption

I Bonds can be purchased through the TreasuryDirect website either as electronic bonds or paper bonds (paper bonds can only be purchased using an IRS tax refund). The annual purchase limit is $10,000 for electronic bonds and $5,000 for paper bonds per Social Security number. So, spouses could purchase a total of $20,000 annually in electronic bonds.

You can cash in your I Bond after 12 months. However, if you redeem the bond less than five years after purchase, you will forfeit the last three months of interest. This seems like a small price for the bond’s flexibility, return and guarantees compared to other conservative investments.

How to Manage and Redeem Your Bonds

Managing I Bonds is straightforward. If you own electronic bonds, you can monitor their value and manage your portfolio through your TreasuryDirect account. For paper bonds, values can be calculated using the Savings Bond Calculator provided by the U.S. Treasury. Keep in mind that for bonds less than five years old, the values shown don’t include the last three months of interest.

Conclusion

Series I Savings Bonds offer a combination of safety, tax benefits, and protection against inflation, making them an attractive choice for investors seeking a low-risk addition for their financial strategy. With the ability to track inflation and ensure a non-negative return, I Bonds stand out as a prudent choice for preserving capital in a fluctuating economic environment. Whether you’re saving for the future, planning for educational expenses, or diversifying your investment portfolio, I Bonds provide a versatile and secure investment option. 

Click here for a discussion of how I Bonds might fit into your investment strategy.