What are Series I Bonds?

Millions of Americans haven’t heard of series I bonds—much less what they are. This guide will break down what bonds are, the pros of I bonds, how they differ from another type of bond (EE bonds), how to buy them, and what you can use them for.

What is a savings bond?

You may have heard of savings bonds through your older relatives or was given one yourself when you were younger. A savings bond is a long-term investment that is often given as a gift for loved ones, especially young children.

Essentially, a savings bond is a loan to the U.S. government issued by the Treasury. When you buy one, you are lending money to the government. Once the bond is bought, only a bond’s owner or beneficiary is able to cash it. While they used to be issued on paper, they are now most commonly available electronically on the U.S. Treasury's website, TreasuryDirect.com. Though paper bonds are not readily available, you can still redeem them at your bank. Savings bonds are investments, but they can’t be held in brokerage accounts.

A key takeaway to savings bonds is that they are the absolute safest investments available because they are a loan from the U.S. government. The government must pay you back. You may have heard that a tax refund after filing taxes is something you want to avoid because they are an ‘interest-free loan you give to the government.’ Well, a savings bond is a loan to the U.S. government that will always earn interest without the risk of losing money.

Series EE bonds vs. Series I bonds

Two types of bonds that are available for purchase are Series EE bonds and Series I bonds. The main difference between these bonds is how their rates grow and how safe of an investment they are.

What is the difference between the different types of savings bonds?

Series EE bond - These types of bonds offer a fixed rate and earn interest, along with a guaranteed return of double the value if the bond is not cashed for at least 20 years. What this means is that regardless of the fixed rate and interest, a Series EE bond gets an adjustment after a 20-year period that doubles the value of the bond.

Series I bond - Series I bonds offer a rate that combines two variables: a fixed rate and an inflation-adjusted rate. The inflation rate is recalculated twice a year, protecting your bond from inflation. These are the safest types of bonds to invest in.

In general, the returns are not as high on I bonds as they are on EE bonds. However, many choose to go the I bond rate for a number of reasons that we’ll get into below.

Understanding I Bonds

As briefly mentioned, Series I bonds are offered as low-risk investments, though they are non-marketable. This means that they can’t be bought or sold in secondary markets. These bonds give investors—that is, the bondholder—a guaranteed return, in addition to inflation protection. Series I bonds offer:

• A 20-year maturity, plus a 10-year extended period.
• An earned fixed interest rate.
• An adjustable, variable inflation rate that is determined every May and November.

The fixed interest rate is decided by the Secretary of the Treasury. Once announced, the rate is applied to all bonds issued in the following six months. The inflation rates are also announced at the same time. Instead of the Secretary of Treasury deciding the inflation rates, they are determined by changes to the Consumer Price Index (CPI)—a metric that gauges inflation in the U.S.

What are the benefits of I bonds?

Because of inflation-adjusted interest rates, I bonds offer some safeguards when planning for future expenses, without the uncertainty of risky investments.

Emergency fund

It’s recommended that everyone has an emergency fund for unexpected expenses that are bound to pop up. If you’re a single-income household, you should have at least 6 months of living expenses saved. For a dual-income family, 3 months of savings is recommended. I bonds are a risk-free investment that you can use as an emergency fund gaining interest over time, rather than just sitting in a low-interest savings account. Due to an I bond’s inflation-adjusted rate, owners can earn 1.81 percent above the market, completely risk-free.

If using an I bond as an emergency fund, it’s important to keep in mind that, for at least the first 12 months of owning the bonds, your emergency funds still need to be liquid assets. This is because I bonds cannot be sold within the first 12 months of purchase, and you may need to dip into that fund before then.

Healthcare premiums

Many use I bonds as a supplement to retirement, as well. Healthcare costs are a major concern for many seniors, with the average amount of healthcare premiums and out-of-pocket costs running $4300 a year. Because I bond interest is tied to inflation, setting aside $4300 a year for future healthcare costs will give you a guaranteed investment that may help cover most or all of your expenses.

Other benefits and ways to use them

• Supplement your retirement income - 401(k)s and IRAs have yearly limits that you can contribute. Many choose to supplement their retirement savings by purchasing the maximum amount of I bonds per year ($10,000). 401(k)s and IRAs are generally considered to be safe investments, but I bonds are risk-free and a good choice for a healthy retirement.
• Protect your savings from inflation - Most savings accounts don’t offer a high interest rate, especially when the economy is suffering. The COVID-19 pandemic tanked most banks’ interest rates for their customers, leaving consumer’s money just sitting in an account. With an I bond, you don’t have to worry about your money becoming less valuable due to inflation.
• Give them as a gift - If you have a young loved one in your life, instead of giving them cash for birthdays and other holidays, consider giving them a savings bond instead. It will seem boring to them, but you’ll be helping them financially in the long run.
• Help pay for education costs - You can cash your I bonds that were issued after 1989 and use them for eligible college costs while not having to pay taxes on the earned interest. Not everyone qualifies for this, though. To qualify for cashing in savings bonds tax-free for college costs, you must:
  • Use the money to pay for qualified education expenses for themselves, spouse, or dependent. Tuition is a qualified expense, while room and board are not.
  • The owner must have been at least 24 years old when the bond was issued. This means that in most cases, the bonds will be owned by the parent. A child may be the beneficiary but not the co-owner if cashing in.
  • Full interest exclusion is offered if your AGI is less than $77,550 for single filers. Partial exclusions are also allowed. You do not get a tax break if your AGI is more than the limit.

How do I buy Series I bonds?

There are two ways that you can buy Series I bonds. These options are:

• Buying them in electronic form on the U.S. government's website, TreasuryDirect.
• Buying them in paper form using your federal income tax return.

For more information about using your federal tax refund to buy savings bonds, visit the U.S. IRS Official Website.

Series I bond FAQs

Are I bonds taxable?

I bonds are taxable for federal income taxes but not for state or local income taxes.

Can you still buy paper bonds, or are they only electronic?

You are able to buy bonds in paper or electronic format. You may only buy paper bonds through your federal income tax return. Paper bonds are available in dollar increments of 50, 100, 200, 500, and 1000 totals. Electronic bonds may be purchased in any amount from $25 to $10,000.

What is the maximum amount you purchase annually?

Paper bonds maximum purchase - $5000 each calendar year

Electronic bonds maximum purchase - $10,000 each calendar year

You can max out this amount every year.

Can the value of I bonds decrease over time or become worth less than what I paid?

No, because of the fixed and inflation-adjustment rates, your bond will never be worth less than what you paid. This means there is no “timing the market” in regards to cashing out.

When are earnings added?

Earnings are added on the first day of each month, with interest compounded annually based on the issue date.

How long can you keep an I bond?

You will gain interest for 30 years. You may cash a bond after 1 year of owning it.

Can I convert paper bonds to electronic bonds?

Yes, and it is recommended to do so. Use SmartExchange created by the U.S. Treasury for more information.

Is it better to have paper or electronic savings bonds?

Electronic is generally recommended. With electronic bonds, you may change registration, can cash out at any time, and view your online holdings and values any time you log in.

Supplement your nest egg by investing in Series I Bonds

It’s unfortunate that many Americans aren’t aware of the money-earning potential of savings bonds. Series I bonds are risk-free investments that are adjusted for inflation. The yields on just about every type of marketable investment have gone down because people have been bidding them all up. However, since I bonds are non-marketable and due to the way their yield is calculated, they're a much more attractive investment and should be considered.

The money can be used as an emergency fund, extra savings, or a way to increase your retirement savings when you’ve maxed out your other options. Buying bonds online is simple, but a fiduciary financial advisor will be able to help guide you and plan out your future financial roadmap. Due to the fact that there are tax-related situations that arise with savings bonds, a fiduciary will be able to give you the best advice for your specific goals.