Series I savings bonds (I bonds)

Also called Inflation bonds

U.S. savings bonds whose interest rate combines a fixed rate with an inflation rate that resets every six months, protecting savings from inflation.

What it means

An I bond earns a composite rate made of two parts: a fixed rate that stays the same for the life of the bond and an inflation rate tied to the Consumer Price Index that is reset every six months. Interest compounds and is added to the bond’s value rather than paid out. The bond’s value cannot fall, and the composite rate cannot go below zero. I bonds are bought electronically from the Treasury, not traded on a market, and the government sets an annual purchase limit.

I bonds cannot be cashed during the first 12 months, and cashing in before five years costs the last three months of interest. They earn interest for up to 30 years. Interest is exempt from state and local income tax, and federal tax can be deferred until the bond is cashed or matures; it may be excluded entirely when used for qualified higher education costs, subject to income limits.

Example

Suppose a saver buys I bonds and cashes them after three years. They receive their purchase amount plus interest, minus the last three months of interest. Waiting until after the five-year mark would avoid that penalty.

How it’s used

Protecting medium-term savings from inflation
Adding a low-risk, inflation-linked holding outside the stock market
Saving for education with potential tax-free interest

Strengths and weaknesses

Strengths

Inflation protection with no risk of losing principal
Backed by the U.S. government
Tax deferral and state and local tax exemption

Weaknesses

Locked up for the first year, with a penalty before five years
Annual purchase limits cap how much can be held
Return can trail other investments when inflation is low

Good to know

Current rates and purchase limits are published by the Treasury and change over time.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.