What Are I Bonds and How to Buy Them?
What You Should Know?
- I bond interest rates adjust semi-annually to the CPI-U index.
- They can be bought online through a TreasuryDirect account.
- Selling the bond before one year will lose all interest earned.
- Selling the bond before five years will lose three months of interest.
Current I Bond Interest Rate:
6.89%
An i bond is a low-risk savings product that the United States Treasury offers. I bonds are debt securities that earn interest for up to 30 years. However, many investors only hold them for one year.
The interest rate on an i bond is composed of a fixed and adjustable rate. The ladder is based on changes in inflation. When the inflation rate increases, so does the i bond rate. The inflation rate is adjusted twice yearly to match the Consumer Price Index for All Urban Consumers (CPI-U).
Redeeming your bond before five years have passed will forfeit three months' worth of interest. I bonds are a safe and affordable way to save for long-term goals like retirement or college tuition. Continue reading to learn more about i bond rates, where to buy them, and the top alternatives.
Historical I Bond Rates
- Electronic I Bond: $25 minimum to $10,000 maximum
- Paper I Bond: $50 minimum to $5,000 maximum
I Bond Rates
The i bond interest rate is 6.89% for bonds issued from November 1, 2022, to April 30, 2023. In the prior six months, the interest rate was 9.62%. As the inflation rate begins to decrease, so will the i bond rate.
The interest rate is made up of two parts: a fixed rate, which remains the same for the life of the bond, and an adjustable rate, which changes with inflation. The two rates are combined to make a composite rate valid for six months. To calculate I bond rates, you can use the following formula:
However, the interest rate is only valid for six months, while the minimum holding period is one year. This means your interest rate will change six months after buying the bond. You can refer to the following table to see when your interest rate changes depending on when you buy the bond.
| Bond Purchase Date | Interest Rate Renewal Date |
|---|---|
| January | July 1, January 1 |
| February | August 1, February 1 |
| March | September 1, March 1 |
| April | October 1, April 1 |
| May | November 1, May 1 |
| June | December 1, June 1 |
| July | January 1, July 1 |
| August | February 1, August 1 |
| September | March 1, September 1 |
| October | April 1, October 1 |
| November | May 1, November 1 |
| December | June 1, December 1 |
Interest Compounding
While technically you earn interest monthly, it's inaccessible until you sell the bond. The accrued interest is compounded semi-annually, meaning the second interest rate applies to the interest earned in the first six months. However, you can't redeem the bond for a minimum of one year.
Additionally, redeeming the bond before five years results in losing three months of interest payments. For example, if you redeem the bond after one year, you would only receive nine months of interest instead of 12.
| Benefits | Drawbacks |
|
|
|---|
Additional Details
There are two versions of i bonds that will affect your purchasing process. The electronic i bond is more popular and can be purchased online through a TreasuryDirect account. The alternative is a paper i bond, which can only be purchased with your tax return.
| Electronic I Bond | Paper I Bond | |
|---|---|---|
| Maximum annual purchase | $10,000 | $5,000 |
| Minimum purchase | $25 | $50 |
| Purchase denomination | $0.01 denomination | $50, $100, $200, $500, $1000 |
| Where to buy | Online | With tax return |
Next, the interest earned on i bonds is subject to federal income tax, but it is exempt from state and local taxes.
I bonds have a minimum holding period of one year and can be held for up to 30 years. Redeeming the bond before five years results in forfeiting three months of interest payments.
They can be redeemed at any time after the one-year holding period. The redemption value includes the original purchase price plus any interest earned.
Where to Buy I Bonds
As mentioned, the type of i bond you want to buy will affect your purchasing process.
You can buy electronic i bonds by opening a TreasuryDirect account. You'll need to provide a tax ID number, such as an SSN or EIN. You'll also need a bank account or routing number.
To buy paper i bonds, you can only do so with your tax return using form 8888. This means you can only buy paper i bonds once a year.
However, many Americans will buy both i bonds for a maximum investment of $15,000.
After buying i bonds, the interest will compound at the updated rate semi-annually. However, selling before one year will void your interest. After one year, you can sell when required. Although redeeming before five years will forfeit the last three months of interest.
I Bond Alternatives
Some alternatives to i bonds include other types of savings bonds, such as Series EE or TIPS, as well as CDs and money market accounts.
It is essential to compare rates and terms before deciding on an investment option. Additionally, investing in stocks or mutual funds may offer the potential for higher returns, but they also carry more risk.
| Interest Rate* | Lockup Period | Minimum Investment | |
|---|---|---|---|
| I Bonds | 6.89% | 12 months | $25 |
| Series EE Bonds | 2.10% | 12 months | $25 |
| TIPS | 1.50% | N/A | $100 |
| Certificate of Deposit | 3.50% - 4.50% | 1 - 5 years | $0 - $1,000 |
| High-Yield Savings Account | 3.00% | N/A | $0 |
Series EE Bond
The US Treasury also issues series EE bonds. They have a fixed interest rate and are guaranteed to double in value after 20 years.
Although similar to i bonds, they do not offer protection against inflation. They also have a maximum purchase limit of $10,000 per year and can be purchased in denominations as low as $25.
Series EE Bonds can be bought electronically through TreasuryDirect or with tax returns.
Treasury Inflation-Protected Securities (TIPS)
TIPS are another type of government bond that offers protection against inflation. However, unlike i bonds, they have no annual maximum purchase limit. As a result, they are popular with institutional investors. This provides significantly more liquidity and selling opportunities. Tips have no lockup period because investors can easily trade them on secondary markets. Additionally, investors must pay taxes on TIPS interest whereas i bonds have some exemptions.
Another difference with TIPS is the inflation protection mechanism. When the inflation rate changes, i bonds adjust interest, and TIPS adjust principal. With TIPS, you will receive the adjusted principal at maturity. With i bonds, you will receive inflation protection earlier through monthly interest accruals.
CD (Certificate of Deposit)
A CD is a deposit account with a fixed rate and term, typically ranging from 6 months to 5 years. The longer the term, the higher the rate of return.
CDs can be purchased at banks and credit unions, with a minimum deposit amount varying by the financial institution. It is important to note that early withdrawal from a CD may result in penalties.
High-Yield Savings Account
High-Yield savings accounts offer the most straightforward withdrawal but the lowest interest rates. They may have minimum balance requirements or limit the monthly withdrawals allowed.
You can open one at most banks and credit unions. However, compare rates and terms before choosing a high-interest savings account.
The Bottom Line
Overall, i bonds offer a low-risk investment option with the benefit of protecting against inflation. Additionally, remember that I bonds have a minimum holding period of one year, and early redemption may result in forfeiting interest payments.