What Is a Series I Bond?

What Is a Series I Bond?

Let me explain what a Series I Bond is. These are savings bonds issued by the U.S. Treasury, often called I Bonds, and they give you a mix of safety and inflation protection. You can count on them as one of the lowest-risk investments out there, since they're backed by the full faith and credit of the U.S. government.

Unlike regular savings bonds or accounts, I Bonds earn interest from a fixed rate that stays the same for the bond's life and a variable inflation rate that gets updated twice a year based on the Consumer Price Index (CPI).

Most I Bonds are electronic, but you can get paper ones starting at $50 if you use your tax refund, as per TreasuryDirect.

Understanding Series I Bonds

Series I bonds are non-marketable, part of the U.S. Treasury's savings bond program for low-risk investments. Since they're non-marketable, you can't trade them in secondary markets. They earn two types of interest: a fixed rate for the bond's life and an inflation rate adjusted every May and November based on the non-seasonally adjusted CPI-U.

These bonds are issued with a fixed rate for up to 30 years, plus the variable inflation rate, which helps shield you from inflation's effects.

The fixed rate is set by the Secretary of the Treasury and announced on the first business day of May and November. It applies to all I Bonds issued in the next six months, compounds semiannually, and doesn't change.

The variable rate is also announced in May and November, based on CPI changes that measure U.S. inflation. This rate applies to the bond every six months from its issue date.

Important point: the interest on I Bonds is variable and changes, so predicting the bond's future value is tough.

How to Calculate Series I Bonds

The bond's actual rate, called the composite rate, combines the fixed and inflation rates. Inflation affects the fixed rate, but the Treasury sets a zero floor—if the rate goes negative beyond the fixed part, it drops to zero.

The formula is: Composite rate = fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate).

For instance, with a 0.30% fixed rate and -2.30% semiannual inflation, it calculates to -4.31%, but gets adjusted to 0%.

Currently, the composite rate for I Bonds issued from November 1, 2023, to April 30, 2024, is 5.27%, including a 1.30% fixed rate. Adjustments happen on May 1 and November 1.

Are I Bonds Good Investments?

You need to weigh the pros and cons of Series I Bonds.

Series I Bond Benefits

One big benefit is the low risk—they're backed by the U.S. government, so your principal is safe.

They also protect your purchasing power against inflation, with the variable rate adjusting semiannually via CPI, so rising inflation boosts your rate.

On taxes, interest is exempt from state and local levels, which helps in high-tax areas. Plus, if you use proceeds for qualified higher education, federal taxes might not apply.

Series I Bond Drawbacks

With safety comes lower returns, similar to high-yield savings or CDs. You can't trade them on secondary markets, so you're stuck holding until redemption with the Treasury.

Liquidity is limited—you must hold for one year minimum, and redeeming within five years costs three months' interest.

Purchase limit is $10,000 electronic per SSN per year (minimum $25), plus $5,000 paper. This might not suit larger investments.

While rates can be good in high inflation, they don't match long-term growth from stocks or real estate. Consider your goals and risk tolerance.

Series I Bonds and Interest Income

Interest is taxable federally but not at state or local levels. These are zero-coupon bonds—no payments during life; interest adds to the bond's value and compounds.

Choose cash method (taxed on redemption) or accrual method (taxed yearly on imputed interest).

Sometimes federal tax-free if used for higher education in the same year as redemption.

Series I Bonds vs. Series EE Bonds

Both are safe U.S. government bonds, but differ in key ways.

I Bonds have a fixed rate plus variable inflation rate adjusted twice yearly via CPI, protecting against inflation. EE Bonds (post-May 2005) have a fixed rate that's constant, usually lower, but guarantee doubling in 20 years (3.5% annual return).

Purchase limits: I Bonds up to $10,000 electronic + $5,000 paper via refund; EE up to $10,000 electronic, no paper limit. Denominations start at $25 for both.

Both mature in 30 years, require one-year hold, and penalize early redemption. Tax benefits are similar: federal tax but exempt state/local, tax-free for education.

Pick I Bonds for inflation protection, EE for predictable long-term returns.

Where Can I Buy Series I Savings Bonds?

Buy them online via TreasuryDirect or use your tax refund.

How Much Money Can I Make with an I Bond?

If you buy $10,000 at 5.27% composite rate, and it holds for a year with semiannual compounding, you'd earn about $535. But rates change every six months, and early redemption has penalties.

What Tax Form Do I Need for Purchasing with Tax Refund?

File IRS Form 8888 with your return; the IRS mails the bonds.

Historical Interest Rates for Series I Bonds

Rates vary by issue date and inflation; check historical tables for fixed and variable components.

How Long Does It Take for a Series I Bond to Mature?

They mature in 30 years: 20-year original plus 10-year extension.

The Bottom Line

Series I Bonds are a solid low-risk, inflation-protected option from the U.S. government. They combine fixed and variable rates to maintain purchasing power, but note the limits, holding periods, and penalties. They might not grow like stocks, so base your choice on your financial goals and risk level.