What are I bonds, and how do they work?

Key points

• I bonds are government-issued investments combining fixed and inflation rates.
• I bonds are considered a safe investment, particularly during high inflation.
• I bonds have 30-year maturities and can be cashed in after 12 months.

I bonds are government-issued investments offering a unique blend of fixed rates and inflation rates. They are generally regarded as safe and reliable, particularly during periods of high inflation. But investing in I bonds requires a solid understanding of how they work, their potential benefits and limitations.

Learning more about I bonds will help you decide if they are suitable options for your investment needs. Whether you’re a seasoned investor or just starting to navigate the investment world, we’ll provide you with information so you can make an informed decision about these government-backed bonds. 

How do I bonds work?

I bonds are loans upon which the issuer — in this case, the U.S. government — pays interest and returns the original investment, or principal, when the bond matures. 

You can expect to earn interest that includes both:

•  A 1.30% fixed rate.
•  A 1.48% inflation rate.

Input those numbers in the government’s fancy formula, and you’ll see that your bond will earn 4.28% interest, known as the composite rate, through Oct. 31, 2024.

The fixed rate for I bonds is announced every six months — on May 1 and Nov. 1 — and applies to I bonds issued in the next six months. The inflation rate, which is related to the consumer price index, usually changes every six months and is also set on May 1 and Nov. 1. 

I bonds mature in 30 years, after which you receive the principal, plus interest. You can cash out your I bonds after 12 months, but you will be penalized three months’ worth of interest for bonds less than five years old.

How much in I bonds can I buy?

You can purchase up to $10,000 of electronic I bonds on the Treasury’s website each calendar year, with a minimum of $25. You can buy them in penny increments.

You can only buy them only on the TreasuryDirect website, where you will be asked to create an account. The interest is added to the bond until it reaches 30 years or you cash it in, whichever comes first.

How do paper I bonds work?

“With everything slowly becoming digitized, paper I bonds are often forgotten,” says Craig Birk, chief investment officer at Empower. 

You can only purchase paper I bonds only with your tax refund. The amount of your purchase can be any multiple of $50, up to $5,000. 

“Other than ensuring you save some or all of your refund, there is no particular advantage to owning paper bonds over their digital counterparts,” Birk says. 

To recap, you can buy up to $10,000 in electronic I bonds and up to $5,000 in paper I bonds for a total of $15,000 in a given year.

Who can buy I bonds?

You can buy I bonds for yourself, for your child or as a gift for someone else.

“I bonds can be purchased by individuals and by trusts,” says Akeiva Ellis, a certified financial planner who writes for young adults at The Bemused. “This includes children under 18 if the minor has their adult custodian create a minor-linked account. I bonds cannot be purchased by businesses.”

What are the risks of I bonds?

“I bonds are essentially risk-free unless the U.S. government manages to default,” says Luis Alvarado, investment strategy analyst at Wells Fargo. “Besides that, they are generally regarded as a good vehicle to protect your savings from inflation.” 

“The only small disadvantage is that there is an interest penalty if the bonds are redeemed in the first five years,” Alvarado says. “The penalty enforced is a loss of three months of earned interest. For example, if you sold your I bond at 18 months, you would only receive 15 months of earned interest.”  

Another risk of investing in I bonds is that you might miss out on a more lucrative investment. Whether that matters to you depends on your financial situation and appetite for risk.

How I bonds are taxed

I bonds are taxed at the federal level, but you might be able to avoid those taxes if you use the money for qualified higher education expenses. If you do have to pay taxes, only the interest you’ve earned is taxed, not your original investment. I bonds aren’t taxed at the state or local level.

When it comes to reporting interest, you have options. 

“You can either report accrued interest each year or defer until you either cash in the bond, surrender ownership of or gift the bond, or the bond reaches its maturity year and stops accruing interest, whichever happens first,” Ellis says. 

Who are I bonds best for?

Alvarado says I bonds are often mentioned by his “really conservative investors who are worried about inflation ‘eating away’ the real value of their money.”

“When inflation hit a four-decade high back in 2022, the higher yields and lower risk of I bond investing was really attractive to these types of investors,” Alvarado adds.   

I bonds generally are buy-and-hold investments that see better returns the longer you own them. If you want to invest in the short term, I bonds might not work for you. Take this route for your long-term investments as a way to slowly build wealth and as a haven from market volatility.

Frequently asked questions (FAQs)