At A Glance – I Bonds are a type of savings bond issued by the U. S. Treasury and have recently become attractive because their interest rate is tied to inflation. And if you haven’t noticed inflation lately, you’re living under a rock!
What Are I Bonds?
Series I savings bonds, or I Bonds (that’s an I, not a 1), are a type of savings bond issued by the U. S. Treasury. The interest rate for I Bonds is tied to the US inflation rate and changes every 6 months. These bonds are one of the safest places you can put money since they are issued and backed by the U.S. Government.
I Bonds have been around since 1998, but they have become much more attractive recently. Why you ask? Because inflation has gone up dramatically in the last few months. This makes I Bonds a more attractive place to park some of your cash compared to a bank savings account or CD.
How Do They Work?
I Bonds can only be purchased through the U. S. Treasury. Digital bonds can be purchased at www.treasurydirect.gov. Paper bonds can be purchased with your Federal Income Tax Return. The interest rate on an I Bond is a combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year. The inflation rate is changed on the first business day of November and the first business day of May.
Electronic I Bonds can be purchased in any amount from $25 to $10,000. Paper I Bonds are issued in denominations of $50, $100, $200, $500, and $1,000. The maximum you can purchase is $10,000 (electronic) per individual per calendar year and $5,000 (paper) per Income tax return.
An I Bond earns interest monthly from the first day of the month in the issue month. For example, if you buy a bond on December 31st, the bond will earn interest from December 1st. The interest is compounded semiannually. Every six months from the bond’s issue date, all interest the bond has earned in the previous 6 months is added to the bond’s value. Interest is then earned on the new principal for the next six months. An I Bond will continue to earn interest until the bond reaches 30 years or you cash the bond, whichever comes first.
I Bonds MUST be held for a minimum of 12 months. If you cash a bond between 12 months and 5 years, you will lose the last 3 months of interest. After you have held a bond for 5 years, you do not lose any accrued interest.
What Is The Interest Rate For An I Bond?
The interest rate is a combination of a fixed rate and an inflation-adjusted rate. The fixed rate does not change for the life of the bond. The inflation-adjusted rate changes twice a year. The inflation component is based on the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy. The calculation used to determine the interest rate can be found here on the Treasury Direct website.
Currently (as of 11-1-21) the interest rate for I bonds is 7.12% annually. The two components of the current rate are Fixed Rate = 0.00% and Inflation Rate = 7.12% annually. This rate will change on May 2, 2022.
How Do You Purchase I Bonds?
I Bonds are sold at face value. You will pay $1,000 for a $1,000 bond. To buy electronic bonds from Treasury Direct, you must create an account and link your bank account to it. The funds to pay for the bond will be transferred from the linked account. Then purchase them in any amount you desire up to $10,000. A serial number will be assigned to each bond. You can use this serial number to check on the value of your bond with Treasury Direct’s Bond Value Calculator.
You don’t have to buy the whole amount in one bond. I recently purchased $10,000 worth of bonds for myself. Instead of buying one $10,000 bond, I purchased ten $1,000 bonds. This way I have left myself flexibility when cashing them.
After you have purchased your bonds, be sure to add any appropriate beneficiaries to each bond. Also, if you have a Legacy Box or Binder with instructions for handling your estate, be sure to add your Treasury Direct Account and bond info to that box. Otherwise, your executor may not know they exist.
How Are I Bonds Taxed?
The interest on I bonds is taxed at the Federal level but is not taxed at the state or local level. The tax will be reported to you on IRS form 1099-INT when the bonds are cashed out. If you cash electronic bonds in your Treasury Direct account, the 1099-INT will be available to your early the next year in your account.
How Do You Redeem An I Bond?
When you are ready to cash out a bond(s). Go to your TreasuryDirect account and select ManageDirect. Then select Redeem Securities. Select the securities you want to redeem and select where you want the money to go. Remember, I Bonds cannot be cashed until held for 12 months.
Other Resources
There are several new articles that have been written about I Bonds. One that I would suggest is written by Leif at Physician On Fire. Here is the link to his article How (and Why) to Buy I Bonds from Treasury Direct. Also, you can find all information relating to I Bonds on TreasuryDirect. Including items I have not discussed, such as gifting and using I Bonds to pay for education.
Should You Buy Them?
Only you can answer that question, but for me, the answer was yes. I used money that was already sitting in cash – and not earning much. Money Market account, savings account, or CD rates are extremely low right now (2021). I bought $10,000 worth of bonds in 2021 and will buy another $10,000 in 2022. I am planning on holding these for at least 15 months. They will earn 6 months of the current annual rate of 7.12% (or 3.56% for half the year) and 6 months of whatever the next interest rate is. I don’t know what that will be, but I feel it can’t be worse than what I’m making now. I plan on holding them for 15 months so I get 12 months’ worth of interest. If the interest rate is still attractive, I will continue to hold.
For me, I look at the $20,000 I will have tied up in the bonds as the back-end of my cash bucket. I try to keep 2-3 years of living expenses in cash. These bonds will be part of my 2023 or 2024 cash.
Again, I CANNOT and WILL NOT tell you what is right for you. Take this information and make your own evaluation. I’m bringing all this to your attention in case, like me, you didn’t know these I Bonds existed.
Key Takeaway – The I Bond’s interest rate has become attractive because it is tied to inflation which has taken a recent jump.
Assignment – Educate yourself about I Bonds to determine if they are a smart investment for you. If so, open your Treasury Direct account, link your bank account, and buy the amount of I Bonds you have determined. You can buy as little as $25 or as much as $10,000.
