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Many investors are looking for ways to preserve their cash while still earning a solid return—and that's where I Bonds come in.
These savings bonds are issued by the U.S. Treasury and are designed to protect your money from inflation. Unlike traditional bonds, their interest rate adjusts over time based on current inflation data.
What Are I Bonds?
I Bonds are U.S. government-backed savings bonds designed to protect your money from inflation.
Issued by the Treasury Department, they offer a combination of a fixed interest rate and a variable rate that adjusts every six months based on the Consumer Price Index (CPI-U).
You can buy them directly from the Treasury’s website, up to $10,000 per person per year (plus an extra $5,000 using your tax refund).
What makes I Bonds unique is their inflation protection. Unlike regular savings accounts or CDs, their rate adjusts to help you maintain your purchasing power.
They're also exempt from state and local income taxes and can be used tax-free for qualified education expenses, making them attractive for both savers and long-term planners.
How I Bonds Earn Interest Through Fixed and Inflation Rates
I Bonds earn interest through two components:
Fixed rate: Set when you buy the bond, it stays the same for the life of the bond.
Inflation rate: Adjusted every May and November based on inflation data (CPI-U). This changes over time and can rise or fall.
The two rates combine into a composite rate, which compounds semiannually. You earn interest monthly, and it’s added to the bond’s value every six months.
Why investors consider I Bonds:
Offer inflation protection without market risk
Interest is tax-deferred until redemption
Useful for long-term savings or emergency funds
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Example 1: A Safe Long-Term Option:
Let’s say you bought $10,000 worth of I Bonds in May 2024, when the fixed rate was 0.9% and the inflation rate was 3.4%.
The composite rate would be around 4.3%. That rate would apply for the next six months.
If inflation rises in November, your interest rate goes up with it. This gives you a cushion when the cost of living spikes.
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Example 2: Protecting Cash Reserves
Imagine you're setting aside money for a home purchase in a few years. Instead of leaving $5,000 in a low-yield savings account, you buy I Bonds.
If inflation hits 5% over the next year, your return keeps pace. You won’t get rich—but your money holds its value while staying safe and federally guaranteed.
I Bonds vs. TIPS: Which Is Better for Inflation Protection?
Both I Bonds and Treasury Inflation-Protected Securities (TIPS) are backed by the U.S. government and designed to fight inflation, but they work differently and suit different goals.
I Bonds are ideal for individual investors looking for simplicity and tax deferral. You purchase them through TreasuryDirect, and they can be a great option for building a long-term emergency fund.
TIPS, on the other hand, trade on the open market and are better suited for larger portfolios or those looking for inflation hedges within IRAs or mutual funds.
Feature | I Bonds | TIPS (Treasury Inflation-Protected Securities) |
|---|---|---|
Purchase Platform | TreasuryDirect only | Brokerages or TreasuryDirect |
Interest Structure | Fixed + inflation (CPI-U) | Fixed rate + inflation-adjusted principal |
Tax Treatment | Federal only (state/local exempt); tax-deferred | Taxable annually (federal only) |
Purchase Limits | $10,000/year + $5,000 via tax refund | No annual limit (buy any amount) |
Early Redemption Rules | 1-year lock, 3-month penalty if < 5 years | Can be sold anytime on secondary market |
Ideal For | Individual savers, long-term holders | Active investors, IRAs, bond ladders |
Pros and Cons of Investing in I Bonds
Here’s a quick look at the key advantages and drawbacks of I Bonds, based on real use cases:
Pros | Cons |
|---|---|
Inflation protection | Purchase limits |
Government-backed security | 12-month lock-in period |
Tax-deferred growth | Penalty for early withdrawal |
State/local tax exemption | No brokerage integration |
Education tax benefits | Variable return based on inflation |
- Inflation protection
I Bonds are designed to keep pace with inflation by adjusting their interest rate every six months based on CPI data.
- Government-backed security
They’re backed by the U.S. Treasury, making them one of the safest investments available.
- Tax-deferred growth
You don’t have to pay federal taxes on the interest until you cash them in, potentially decades later.
- State and local tax exemption
Interest earned on I Bonds is exempt from state and local income taxes.
- Purchase limits
You can only buy up to $10,000 electronically per year (plus $5,000 via tax refund), which may be too restrictive for high-net-worth investors or those wanting more exposure.
- 12-month lock-in period
You must hold I Bonds for at least one year before redeeming. This means they’re not suitable for emergency funds or very short-term goals.
- Early withdrawal penalty
If you cash out within five years, you forfeit the last three months of interest.
- No brokerage integration
I Bonds can’t be held in brokerage or retirement accounts, so you’ll need a separate TreasuryDirect account to manage them.
Ways to Get Exposed to I Bonds
While you can’t buy I Bonds through a traditional brokerage account or ETF, there are still a few direct ways to gain exposure.
Ways to invest in I Bonds:
TreasuryDirect.gov: The primary method for individuals to buy up to $10,000 per year in electronic I Bonds.
Tax refund option: Use your federal tax refund to buy up to $5,000 in paper I Bonds, often used by those without TreasuryDirect accounts.
Gifting I Bonds: You can buy I Bonds as a gift for someone else (e.g., a child or grandchild) and hold them in your gift box on TreasuryDirect until they’re ready to receive them.
Trusts and entities: Trusts, estates, and businesses can also purchase I Bonds, adding diversification to non-individual portfolios.
How to Buy I Bonds on TreasuryDirect?
To buy I Bonds, you’ll need to open an account on TreasuryDirect.gov. It’s free, takes just a few minutes, and requires your Social Security number, email address, and bank details.
Once you're in, you can purchase up to $10,000 in I Bonds per calendar year using funds from your checking or savings account.
For example, let’s say you want to invest $5,000 as a long-term inflation hedge. After funding your TreasuryDirect account, you can buy I Bonds instantly and track your interest earnings through your online dashboard.
You won’t receive physical certificates—unless you opt to use your tax refund, which allows for up to $5,000 in paper I Bonds.
FAQ
No, I Bonds cannot lose value as long as you hold them. Their principal is protected, and interest is added monthly.
Yes, I Bonds can be a safe way to save for a child’s education, especially since interest can be tax-free if used for qualified expenses.
They can be transferred to a beneficiary or included in the estate. You can also designate a co-owner or beneficiary on TreasuryDirect.
Yes, they mature in 30 years, but you can cash them in anytime after the first year, with a penalty if redeemed before five years.
Interest accrues monthly and compounds semiannually, but it isn’t paid out until you redeem the bond.
No, I Bonds can't be held in retirement accounts like IRAs or 401(k)s. They must be held through TreasuryDirect or as paper bonds.
No official mobile app exists for TreasuryDirect, but the website is mobile-friendly for checking balances or making purchases.
Yes, interest is compounded semiannually. This means your interest earns interest every six months.
They are only liquid after 12 months, so they’re not suitable for very short-term needs but can serve as part of an emergency fund beyond that.
