Series I Savings Bonds: What You Need to Know

Series I savings bonds are issued by the U.S. Treasury and have interest rates tied to inflation. But you can’t grab one today and cash it in tomorrow. Rather, Series I bonds can’t be cashed in until at least a year after purchase, and you’ll pay an interest penalty if you cash them in before five years.

In an inflationary environment, I bonds provide investors with a strong guaranteed return which can help protect purchasing power. We’ll get you up to speed on how I bonds work, annual purchase limits and how to add them to your portfolio.

In an inflationary environment, I bonds provide investors with a strong guaranteed return, as long as they’re willing to sacrifice short-term liquidity.

How do Series I savings bonds work?

The U.S. Treasury sells Series I bonds directly to investors as a low-risk, guaranteed way to grow their money for up to 30 years. Each year, you can purchase up to $10,000 in electronic I bonds via the Treasury Direct website, and up to $5,000 in paper I bonds through the mail when filing your federal income taxes. U.S. citizens, residents and civilian employees — plus trusts, estates, and other entities — can all purchase I bonds.

The Treasury sets new I bond rates at the beginning of May and November. Rates fluctuate with inflation, so they’re subject to change over time. Interest rates are calculated with a combination of a fixed rate set at the time of bond purchase and a variable rate based on the Consumer Price Index for all Urban Consumers (CPI-U).

I bond interest rates

The composite interest rate for I bonds is calculated as:

The current rate of 9.62% is calculated as:

The fixed interest rate has been set at zero since 2020.

When you first purchase an I bond, its interest rate applies for the first six months of the bond, and your I bond rate will continue to change every six months. For example, if you buy an I bond in June, the bond will maintain the same rate until its next rate takes effect six months later in December.

Since Series I bonds are long-term savings vehicles, remember that:

• I bonds can’t be redeemed until a year after their purchase.
• There’s a three-month interest penalty if you redeem an I bond within five years of purchase.
• I bonds continue to accrue interest until they mature after 30 years.

Even though it’s difficult to project exactly how much they’ll be worth over time, I bonds are guaranteed to at least preserve the real value of the bond.

“One advantage I bonds have over regular bonds is that you can redeem them after the first year without the possibility of a loss. For regular bonds, you may have to sell them at a loss if interest rates have risen,” says Ken Tumin, senior industry analyst at MagnifyMoney.

To purchase digital Series I bonds online, set up an account with TreasuryDirect. You’ll need your taxpayer ID number (often your Social Security number), a U.S. address of record, a checking or savings account and an email address. Once you’ve opened an account, you can purchase electronic I bonds.

You can also purchase Series I savings bonds as paper bonds when filing your federal income tax returns. To do so, you’ll file IRS Form 8888, which lets you use part or all of your income tax return to buy them.

“One big difference between the I bond and a standard bond is that savings bonds are not marketable securities, so you can’t buy and sell savings bonds from a brokerage firm,” says Tumin.

However, buying I bonds from the U.S. Treasury can sometimes be difficult. While opening a TreasuryDirect account, ID verification can be a roadblock for some.

“TreasuryDirect may require that the applicant mail in a paper form,” according to Tumin, which “requires a signature guarantee from a financial institution.” Since many banks and credit unions don’t offer that service, it can be a challenge to obtain that signature guarantee and submit the form.

If you’re curious about buying bonds that aren’t I bonds, be sure to check out our comprehensive guide to bond buying.

How to cash in I bonds

Once you’ve held an I bond for a year, you can cash it in, but at a price — you’ll pay a penalty of three months’ interest if you cash it in within five years.

You can cash in electronic I bonds through the TreasuryDirect website. You don’t need to cash in the entire value of the bond at the same time. You’ll receive your funds via a direct deposit into your bank account.

You can cash in paper I bonds at some banks (but not every bank will cash savings bonds). If that isn’t an option, you can send them to Treasury Retail Securities Services along with FS Form 1552. You may need to verify your identity, which can be a cumbersome process.

Series I bond taxes

Tumin notes that I bonds have tax advantages relative to other investments and certificates of deposit (CDs): You’ll earn interest tax-deferred throughout the life of the bond until you cash it in.

“Federal taxes on regular bonds held outside of retirement accounts cannot be deferred like this,” he says.

When you cash in a Series I bond, you’ll pay federal taxes on the earned interest unless you use the funds for certain educational expenses. TreasuryDirect will provide a 1099-INT form to report that income on your federal income tax return. And while you may owe Uncle Sam, you won’t be subject to state or local taxes on your I bond interest earnings.

Are Series I bonds a good investment?

According to Tumin, Series I bonds are a safe, reliable way for small investors to outpace inflation. Relative to CDs, which currently pay much lower interest rates, Series I bonds provide investors with a much better yield and will likely continue to do so until the post-pandemic inflation spike subsides.

Tumin notes that I bonds are a useful way to obtain some inflation protection for your savings, and that they can be a useful savings product to supplement your emergency fund. I bonds are a safe, reliable investment if you know you won’t need the money for several years and want to avoid having inflation eat away at the value of your savings.