I Bonds are savings bonds that are 100% backed by the U.S. federal government. They are designed to protect the value of your money from inflation. The “I” stands for inflation. The interest rate on I Bonds is directly correlated with inflation.
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.
I Bond Cons
The initial rate is only guaranteed for the first six months of ownership. After that, the rate can fall, even to zero. One-year lockup. You can't get your money back at all the first year, so you shouldn't invest any funds you'll absolutely need anytime soon.
Series I bonds are considered low risk since they are backed by the full faith and credit of the U.S. government and their redemption value cannot decline. But with this safety comes a low return, comparable to that of a high-interest savings account or certificate of deposit (CD).
Backed by the U.S. Treasury, Series I savings bonds are considered a relatively safe way to see a high yield on your investments. However, keep in mind that you cannot simply sell the bond once the interest rate falls.
I bonds can be a safe immediate-term savings vehicle, especially in inflationary times. I bonds offer benefits such as the security of being backed by the full faith and credit of the U.S. government, state and local tax-exemptions and federal tax exemptions when used to fund educational expenses.
Inflation sucks, but there is one upside: It's still a great time to buy a government-backed I bond. Series I savings bonds are conservative, safe investments that rise and fall with inflation, and they're earning far more than the best high-yield savings account or certificate of deposit.
Effective today, Series EE savings bonds issued May 2022 through October 2022 will earn an annual fixed rate of . 10% and Series I savings bonds will earn a composite rate of 9.62%, a portion of which is indexed to inflation every six months.
Cons of Buying I Bonds
I bonds are meant for longer-term investors. If you don't hold on to your I bond for a full year, you will not receive any interest. You must create an account at TreasuryDirect to buy I bonds; they cannot be purchased through your custodian, online investment account, or local bank.
If you're looking to diversify your portfolio amid the sluggish stock market right now, you might consider Series I bonds as a safe long-term investment with a reliable return. For most people, long-term investing in low-cost index funds is the best path toward financial independence.
Normally, you're limited to purchasing $10,000 per person on electronic Series I bonds per year. However, the government allows those with a federal tax refund to invest up to $5,000 of that refund into paper I bonds. So most investors think their annual investment tops out at $15,000.
Bonds, especially bonds from governments and major companies, also tend to be a safe investment. They can also offer much higher return than savings accounts. In exchange for the higher return, you give up flexibility because you cannot redeem bonds at any time.
The composite rate for I bonds issued from November 2022 through April 2023 is 6.89%.
Bonds are safer for a reason⎯ you can expect a lower return on your investment. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment.
$10,000 limit: Up to $10,000 of I bonds can be purchased, per person (or entity), per year. A married couple can each purchase $10,000 per year ($20,000 per year total). 7.12% interest: The yield on I bonds has two components—a fixed rate and an inflation rate.
The main way is to go online using TreasuryDirect.gov, and the I bonds bought through this website are digital. There's also an entirely separate way to purchase paper I bonds.
Series I savings bonds — commonly known as I-bonds — currently offer an interest rate of 6.89%. While that's lower than the 9.62% they offered during the six months that ended November 1, it's still an attractive rate for savers who would otherwise be putting money into a savings account or CD.
The basics
The fixed rate of an I Bond will never change. Purchases through April 30, 2023, will have a fixed rate of 0.4%, which means their return will exceed official U.S. inflation by 0.4% until the I Bond is redeemed or matures in 30 years.
When we compare the historical 6-month composite rates against 12-month Treasuries at the time we see that the 6-month I bond rate is an average of 0.31% lower. At an initial rate of 6.89%, buying an I bond in October gets roughly 2.1% more compared to the 4.76% 12-month treasury rate (December 13, 2022).
November 1, 2022. Effective today, Series EE savings bonds issued November 2022 through April 2023 will earn an annual fixed rate of 2.10% and Series I savings bonds will earn a composite rate of 6.89%, a portion of which is indexed to inflation every six months.
It has been a long time coming, but 2023 looks to be the year that bonds will be back in fashion with investors. After years of low yields followed by a brutal drop in prices during 2022, returns in the fixed income markets appear poised to rebound.
I bonds can be excellent options for retirees to build up the conservative bucket of their retirement income plan. As low-risk investments, they are a way for risk-averse investors to beat inflation without putting more resources into the stock market.
Series I bonds do offer some tax advantages, too. Interest on the bonds is exempt from state and local taxes, though you'll still have to pay federal taxes on the gains. And using the interest to pay for higher education may help you avoid paying federal taxes on the interest income, too.
U.S. government securities–such as Treasury notes, bills, and bonds–have historically been considered extremely safe because the U.S. government has never defaulted on its debt. Like CDs, Treasury securities typically pay interest at higher rates than savings accounts do, although it depends on the security's duration.