US Treasury Series I bonds are inflation-indexed savings bonds. They provided a good alternative to cash when your objective is to protect the value of your capital in rising interest rate environments. Unfortunately, due to purchase limits, these bonds are not worthwhile for many people.
The Bureau of the Public Debt is the only seller of these bonds so you are unlikely to learn about them through your bank or broker.
Current interest rate on i Bonds from May 1, 2024 to October 31, 2024: 4.28%
Rate Breakdown
Fixed 1.30%
Variable: 2.98%
Series I bonds are issued by the U.S. Treasury at face value and have a maximum duration of 30 years. These bonds can be sold any time after five years without penalty, and between one and five years after purchase with a loss of the most recent three-months’ interest.
Series I bonds are now issued in both paper and electronic format. The US Treasury now limits purchases to $10,000 per individual in electronic format through TreasuryDirect.gov, and allows a purchase in paper format up to $5,000 provided it is purchased with an IRS tax refund check.
The interest rate on Series I bonds is reset biannually - on May 1 and November 1. The composite rate at any time is determined by adding a fixed rate set at the issuance of the bonds and a variable rate that resets on each semi-annual reset date.
The first component is a fixed rate. On May 1, 2024, the Treasury elected to give bonds purchased through October 31, 2024 a fixed rate component of 1.30%. The fixed rate applies to all bonds purchased in the defined six-month period and does not change during the life of the bond.
The fixed rate component had ben at 1.30% for the prior year, having first been raised to that level in May 2023 from 0.90%. At that time, the 1.30% fixed component was the highest that it has been in 17 years. From May 2009 until May 2018, it had never been higher than 0.20%. In the early 2000s, the fixed rate was as high as 3.60%.
The second component is a variable rate designed to match the inflation rate and calculated on the basis of the change in the Consumer Price Index for Urban Consumers (CPI-U) during a six-month period ending one month before the rate setting date. The variable component is determined by multiplying the actual six-month CPI-U change by two. The variable rate for all outstanding Series I bonds (previously purchased and new purchases) is 2.98% from May 1, 2024 to October 31, 2024. This is significantly lower than the variable component rate in the six months prior of 3.97%, as well as the year ago period of 6.49%, and the 9.62% variable component rate from May through October 2022.
Information on the history of the fixed and variable components of Series I Bonds is available here.
Series I bonds cannot be redeemed under any circumstances in less than 1 year, and any redemptions within 5 years of purchase carry a three-month interest forfeiture. You can maximize your Series I bond performance by making all applicable purchases at the end of a calendar month and sales at beginning of a calendar month, since interest accrues by the month and is not calculated daily. Although currently not the case, during some periods, a purchase of Series I bonds can be significantly superior to a purchase of a one-year CD if you were to sell in one year and a couple of days (on the first possible date that you can get 13 months interest, accepting the 3-months of interest forfeiture). Since the purchase amounts are limited to $10,000 in electronic format per individual - plus an additional $5,000 in paper with an IRS refund check - most people would ordinarily find that the time associated with the transaction is not worth what will be at the most very small gain. Rather, Series I bonds should be thought of as a place to park money that you will not need for at least 5 years and that you want to be sure keeps at pace with inflation.
While Series I bonds are state and local tax free (and federal tax deferred), they are not as liquid as Treasuries and other state and local tax free instruments. As noted above, the are entirely illiquid during the first year of purchase, and have a three month interest penalty if sold within the first 5 years.
Series I bonds can be used for education and college expenses. All interest earned on Series I Bonds may be exempt from Federal tax if the money is used for college tuition within 12 months of the Series I Bond being redeemed. You should consult your accountant for further information (and you should also consider your state's 529 plan for educational purposes)
One significant advantage of Series I bonds, when held over long periods, is that they are state and local tax-free and federal tax is deferred until redemption.
Since interest on Series I bonds is calculated on the basis of the month in which they are purchased (and not the day), there is an advantage to purchasing these bonds at the end of the month in which you intend to purchase and selling at the beginning of the month in which you intend to redeem.
Series I bonds provide strong protection against inflation that shows up in the CPI-U (conversely, these are not good instruments to own in a deflationary or disinflationary environments, especially one accompanied by high short term interest rates).
Unlike Treasury Inflation Protected Securities (TIPS), interest payment on these bonds change and the principal is not adjusted. Therefore, these bonds will not depreciate in value in a deflationary environment; rather, your rate will be reset to the lower rate.
The biggest pitfall is the lack of liquidity in these bonds. These bonds cannot be sold within less than 1 year of purchase, and are therefore substantially less liquid than online savings accounts and money market funds. Moreover, there is a forfeiture of three months' interest if you sell between one and five years of purchase.
If you opt for paper, as opposed to electronic bonds, they should not be lost (they, however, are not bearer bonds). They are most easily redeemable by being physically presented to a savings and loan institution. Most online banks will not redeem these bonds for you.
I Bonds can be purchased by all US citizens and US residents, including minors (who may own directly in their own name). I Bonds may also be purchased by US civilian employees regardless of nationality or residence. I Bonds may be purchased in electronic formats from TreasuryDirect and they are bought at face value. Individuals can purchase up to $10,000 in electronic format each year and $5,000 in paper format with an IRS refund check. US citizens need to provide a social security number which the Treasury uses to track electronic bonds and to be sure that you do not exceed purchase limitation restrictions.
On May 1, 2024, the US Treasury announced a rate on Series EE bond rate of 2.70% (which is steady from the prior six months and up from 2.50% a year ago). hese bonds should still be avoided except in very rare cases where the intention is absolutely not to have access to the money for 20 years as they are guaranteed to double in value from issuance to 20-year maturity (an implicit annualized return of 3.526%). EE bonds are also state and local tax-free and federal tax is deferred until redemption. EE bond purchases are limited to $10,000 per individual and must be purchased in electronic format on TreasuryDirect.gov (these limitations are entirely separate from the limitations on Series I bonds).
Interest from Series I bonds and Series EE bonds are fully taxable at the federal level, but not subject to state and local tax, except that they may be subject to state estate taxes.