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How to Buy I Bonds

I bonds are easy to buy online. But do they make financial sense for your portfolio?

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If you’ve been following the rates on different saving and investment products over the past couple years, you may have considered buying I bonds. Between May and October 2022, I bonds were earning a record 9.62% in annual interest.

“I bonds have exploded in popularity due to their eye-popping interest rates compared to rates in traditional CDs or high-yield savings accounts,” said Elliot J. Pepper, financial planner and director of tax at Maryland-based Northbrook Financial. Since the interest on I bonds is based on the change in inflation, historically high inflation created historically high I bond rates, Pepper explained. 

As inflation continues to cool, I bond rates are ticking down into normal territory. However, they can still be a good addition to your investment portfolio. Read on to understand how I bonds work and whether you should purchase them based on your financial goals.

What are I bonds?

I bonds are issued by the US government with the purpose of protecting your money from inflation. For example, if you put $100 in an envelope last January and it’s still gathering dust, it’s now worth less. Why? Because inflation has made everything cost more, decreasing the value of the dollar over time. I bonds earn interest that helps your savings keep pace with the rising cost of living. 

Here’s a rundown of some important details to know about I bonds:

I bonds earn two interest rates: I bonds have a fixed rate and a variable inflation rate that combine to deliver the composite rate. When you buy your I bond, the fixed rate will stay the same until you cash it out. (Right now, it’s 0.90%.) The government bases the inflation rate on the Consumer Price Index, which measures the average change in the prices paid by urban consumers for a basket of goods and services. 

Rates are set twice each year: On May 1 and Nov. 1, the government announces new fixed and inflation rates. For example, on May 1, 2023, the government announced a fixed rate of 0.90% for all I bonds issued over the next six months. The inflation rate was 1.69%. Based on that information, the Treasury Department calculated a composite rate of 4.30%. 

Your rate changes based on when you buy the bond: While the government announces new rates in May and November, your rate changes six months from the date you actually buy the bond. So, if you buy a bond in March, your rate will change on Sept. 1 and March 1. If you buy a bond in October, your rate will change on April 1 and Oct. 1.

The US government guarantees the investment: This is one of the biggest selling points of I bonds. While corporate and municipal bonds can carry some risks, the backing of the federal government protects your money against risk or hacks, and guarantees the return of the bonds’ principal and interest.

You’ll pay taxes on the interest, but only at the federal level: Interest earned on I bonds is only subject to federal taxes, and those taxes are deferred until the year you redeem the I bond, according to Pepper. That could be an important consideration for higher-income investors in high-tax states, he noted. 

You can’t buy an infinite amount of I bonds: I bond purchases are capped at $10,000 per year per Social Security number, although you can purchase an additional $5,000 of bonds with your tax refund. You need to invest a minimum of $25 in electronic I bonds or $50 in paper I bonds.

You can’t cash in the bond for a while: The minimum holding period for an I bond is one year, but even then, you’ll wind up forfeiting some of the interest. If you cash in the bond in less than five years, you’ll lose the last three months of interest. The full term of an I bond is technically 30 years.

Are I bonds a good investment?

If you’re trying to figure out whether I bonds make sense for your portfolio, there isn’t a universal yes or no answer. There are pros and cons to consider based on your particular investing goals.

Pros

  • Long-term value: “Over time, an I bond will maintain the purchasing power for the investor who bought it,” said Pepper. That’s especially helpful for a low-risk investor or someone nearing retirement, he said.

  • Stability: I bonds are considered safe investments since they’re backed by the government and not volatile like investing in stocks.

  • State tax benefits: You won’t pay taxes on interest from I bonds on your state income taxes, which can be a nice selling point compared with CDs and savings accounts. Plus, your taxes on earnings at the federal level don’t hit until you actually cash in the bond.

Cons

  • Lower returns: Some experts note that you’ll get significantly higher returns over time by investing in stocks. “I bonds should never be a substitute for investing long term in the stock market,” said Casey T. Smith, president of Georgia-based Wiser Wealth Management.

  • Penalty for cashing out early: You won’t get access to interest until you cash the bond or until maturity. If you cash in the bond before the five-year anniversary, you‘ll lose the last three months of interest you earned.

  • Extra hassles: It might be an easier process to shop for a high-yield savings account, Smith said. Many have high annual percentage yields up to 5% and are backed by the government via FDIC insurance, but don’t have the same holding period restrictions as I bonds, he said.

Understanding I bonds vs. EE bonds

If you’re thinking about I bonds, you may want to also consider the government’s other option: EE bonds. These hold quite a few similarities with I bonds, but there is one notable difference -- the government guarantees that an EE bond will double in value in 20 years. That may sound promising, but it’s important to square that doubling with the potential for inflation to impact what that’s really worth. For reference, EE bonds are currently paying 2.50% interest, far short of the 4.30% attached to I bonds.

Is now a good time to buy I bonds?

In the second half of 2023, I bonds aren’t looking all that appealing, especially compared to the generous rates you can find on more liquid deposit products at banks and credit unions. I bonds are currently paying an annualized rate of 4.30%, which is around (or lower) than what you can get in a high-yield savings account or a CD.

If you’re looking for a place to park your cash or a short-term investment, now is not the best time to invest in I bonds due to inflation coming down, according to Pepper. “However, longer-term investors or those approaching retirement could look to I bonds as a nice place to preserve their purchasing power,” Pepper explained. Since an I bond has a fixed rate of 0.90% for the life of the bond, you’ll get a small but real return that’s both tax efficient and nearly risk free, he said. 

Where and how to buy I bonds

The most convenient way to purchase I bonds is at TreasuryDirect.gov, the government’s official site for buying and managing federal savings bonds. It’s a fairly simple process.

1. Create an account

Be prepared to share your Social Security number, your address and the account and routing number of the bank account you plan to use to fund the purchase. 

2. Watch for a confirmation email

You’ll receive your full account number and one-time code to verify your account.

3. Login and purchase your bonds via BuyDirect

If you want to purchase a bond for someone else -- a child, for example -- you’ll need to make sure you include who has access to cash it in. 

Can you still purchase paper bonds?

If the online experience isn’t your cup of tea, the government still offers one old-school, paper-based approach to buying I bonds (EE bonds are all digital). 

You can purchase paper I bonds in $50 increments when you file your federal taxes. You’ll need to inform the IRS that you plan to use part of your refund to buy the bonds, which you can do with IRS Form 8888. You’re capped at a maximum amount of $5,000 this way. 

The bottom line

I bonds can be a great low-risk addition to your investment portfolio, but don’t expect to see the kind of head-spinning interest rates that made these bonds so appealing throughout 2022. The Federal Reserve has been trying to tame inflation, and those efforts are translating to lower I bond rates. There are quite a few other savings products -- high-yield savings accounts and CDs, for example -- that are paying similar rates right now. Shop around, and think carefully about your investment goals and timeline to find the best place to put your money.

David McMillin writes about credit cards, mortgages, banking, taxes and travel. Based in Chicago, he writes with one objective in mind: Help readers figure out how to save more and stress less. He is also a musician, which means he has spent a lot of time worrying about money. He applies the lessons he's learned from that financial balancing act to offer practical advice for personal spending decisions.
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