I Bonds Guide: How Series I Savings Bonds Work
How the I Bond Rate Works
The fixed rate is set by the U.S. Treasury when you buy the bond and never changes. The inflation component resets every May and November based on changes in the CPI-U (urban consumers). When inflation is high, I Bonds pay high rates. When inflation falls, so does the variable component — but the fixed rate provides a floor.
| Rate Component | How It’s Set | How Often It Changes |
|---|---|---|
| Fixed Rate | Set by Treasury at time of purchase | Never changes for the life of your bond |
| Inflation Rate | Based on semiannual CPI-U change | Resets every 6 months (May and November) |
| Composite Rate | Combined formula above | Adjusts every 6 months — can never go below 0% |
Purchase Rules and Limits
| Rule | Details |
|---|---|
| Annual Purchase Limit | $10,000 per person per calendar year (electronic) + $5,000 in paper bonds via tax refund |
| Minimum Purchase | $25 (electronic) — can buy in any amount to the penny above $25 |
| Where to Buy | TreasuryDirect.gov (electronic) or IRS Form 8888 (paper bonds with tax refund) |
| Registration | Registered to individuals — no trusts, corporations, or brokerage accounts |
| Bond Term | 30 years (earns interest for 30 years from issue date) |
Redemption Rules and Penalties
Minimum holding period: You cannot redeem I Bonds for 12 months after purchase. This is a hard lock — no exceptions.
Early redemption penalty: If you redeem between 1-5 years, you forfeit the last 3 months of interest. After 5 years, there is no penalty.
This means if you hold for exactly 12 months, you effectively earn 9 months of interest. If you hold for 5+ years, you receive every penny of interest earned.
Tax Advantages
I Bonds offer notable tax benefits that make them attractive for certain investors:
| Tax Benefit | Details |
|---|---|
| State/Local Tax Exempt | Interest is completely exempt from state and local income taxes |
| Federal Tax Deferral | You don’t pay federal income tax on interest until you redeem the bond (or it matures after 30 years) |
| Education Exclusion | Interest may be completely tax-free if used for qualified higher education expenses (income limits apply) |
I Bonds vs. TIPS
| Factor | I Bonds | TIPS |
|---|---|---|
| Purchase Limit | $10,000/year per person (+$5K paper) | No limit — buy on secondary market or at auction |
| Liquidity | Must hold 12 months; penalty if < 5 years | Trade freely on secondary market |
| Inflation Adjustment | Applied to the interest rate | Applied to the principal value |
| Deflation Protection | Rate floors at 0% — principal never decreases | Par value floors at original principal at maturity |
| Tax Treatment | Federal tax deferred; state/local exempt | Phantom income taxed annually (inflation adjustment to principal) |
| Best For | Small investors wanting inflation protection with tax deferral | Large allocations needing liquidity and no purchase limits |
When I Bonds Make Sense
Emergency fund parking. After the initial 12-month lock-up, I Bonds function as a liquid, inflation-protected savings vehicle — ideal for the portion of your emergency fund you’re unlikely to need immediately.
High-inflation environments. When inflation is running above the federal funds rate, I Bonds often offer higher real returns than money market funds or CDs.
Tax-advantaged savings. The combination of state tax exemption and federal tax deferral makes I Bonds particularly attractive for investors in high-tax states.
Key Takeaways
- I Bonds combine a fixed rate with an inflation-adjusted variable rate that resets every six months
- Annual purchase limit is $10,000 per person (electronic) plus $5,000 in paper bonds via tax refund
- 12-month minimum hold; 3-month interest penalty if redeemed before 5 years
- Interest is exempt from state/local taxes and federal tax is deferred until redemption
- I Bonds guarantee you’ll never lose purchasing power — the composite rate can never go below 0%
Frequently Asked Questions
What is the current I Bond rate?
I Bond rates change every May and November. The composite rate depends on both the fixed rate (set at purchase) and the semiannual inflation rate (derived from CPI data). Check TreasuryDirect.gov for the most current rate. Historical rates have ranged from under 1% to over 9% during the 2022 inflation spike.
Can I buy more than $10,000 in I Bonds?
Each individual is limited to $10,000 in electronic I Bonds per calendar year via TreasuryDirect. You can also buy an additional $5,000 in paper I Bonds using your federal tax refund (IRS Form 8888). Spouses, children, and entities like trusts or businesses each have their own $10,000 limit.
Are I Bonds a good investment right now?
I Bonds are most attractive when inflation is elevated and the fixed rate is reasonable. Compare the I Bond composite rate to alternatives like high-yield savings accounts, CDs, and Treasury bills. The inflation protection and tax advantages are the key differentiators — especially in uncertain economic environments.
How are I Bonds taxed?
I Bond interest is exempt from state and local income taxes. Federal income tax is deferred until you cash the bond or it reaches maturity (30 years). You can also elect to report interest annually. If used for qualified education expenses, interest may be completely federal tax-free, subject to income limits.
Can I lose money with I Bonds?
You cannot lose your principal with I Bonds — the composite rate can never go below 0%, and you will always receive at least the face value when you redeem. The only “loss” scenario is the 3-month interest penalty for redeeming before 5 years, which reduces your total return but never touches principal.