I Bonds' Rate Cools Down While Long-Term Value Increases
Slowing inflation has lowered the variable interest rate for I bonds, but the change comes with a higher fixed rate.
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Due to soaring inflation at the start of 2022, Series I savings bonds quickly became an obvious value investment. When the stock market dropped and crypto flailed, I bonds purchased between May and October 2022 earned a record 9.62% back in annual interest.
How do I bonds work, how much interest do they pay, and who can buy them? Learn the ins and outs of Series I savings bonds to see if they could work for you as a safe investment during uncertain times.
Series I savings bonds are securities backed by the US federal government that provide interest rates that are tied to inflation. I bonds and Series EE Treasury bonds are the only bonds currently sold by the government.
Introduced in 1935 during the Great Depression, savings bonds were created to provide a savings vehicle for Americans, while also raising money for the federal government. Series E defense bonds helped raise significant money to fund US involvement in World War II.
Series I bonds have variable rates that are connected to current inflation data, and their interest rate shifts every six months, depending on whether consumer prices have risen or fallen. Series EE bonds are tied to long-term Treasury interest rates and guaranteed to at least double in value over the course of 20 years.
Originally sold as paper bonds that look similar to large checks, most I bonds are now sold electronically via the TreasuryDirect website. You can also still purchase paper I bonds -- currently featuring portraits of famous Americans like Helen Keller, Martin Luther King, Jr. and Albert Einstein -- using your tax refund.
How do I bonds work?
I bonds can be purchased electronically starting at $25. Paper bonds are currently sold in denominations of $50, $75, $100, $200, $500 and $1,000.
You can buy up to $10,000 of I bonds electronically every year, plus an additional $5,000 in paper bonds if using money from a tax refund.
I bonds are best for those looking for a longer-term, low-risk savings vehicle. You can't cash out your bonds for at least 12 months, and there's a three-month interest penalty for redeeming them before five years. Your I bonds can earn interest for up to 30 years.
You won't receive the interest from I bonds or need to pay taxes on that interest until they're cashed out -- although you can pay taxes each year on the earnings as you go. If you are using I bonds to pay for higher education, you may not have to pay any taxes at all on the interest. Earnings from I bonds are also exempt from state or local taxes.
How much do I bonds pay?
The new inflation rate for I bonds is 4.30% and will last until Oct. 31, 2023. The interest rate of I bonds for the previous six months -- Nov. 1, 2022 to April 30, 2023 -- was 6.89%.
Interest rates determine the amount of money you earn on your savings. I bond interest rates are calculated by combining a fixed rate that stays the same throughout the duration of holding the bond with a six-month variable rate that's based on the Consumer Price Index for All Urban Consumers, or CPI-U, which includes food and energy prices. The variable rate changes twice a year on the first days of May and November.
When I bonds were introduced in September of 1998, the fixed rate was 3.40%, but the days of decent fixed rates ended with the recession of 2008. The fixed rate on I bonds was 0% between May 2020 and November 2022, when it was finally raised to 0.4%. The latest increase to 0.9% marks the highest fixed rate since 2008.
The variable rate on I bonds represents the measured inflation rate for the past year and is the interest rate you'll earn on your savings for the first six months of holding an I bond.
The current variable interest rate for I bonds rate -- 3.38% -- was set by doubling the 1.69% increase in the CPI-U (which measures average price changes to consumer goods for urban consumers) from September 2022 to March 2023.
Pro tip: You receive interest on your I bonds at their current interest rate for six months from the first day of the month you buy them. The current 4.30% rate will last until the end of October, and the six-month term for that rate begins with the purchase of I bonds.
Why you might consider buying an I bond
For the past few year, Series I savings bonds have paid more interest than savings accounts or certificates of deposit, though rates are currently very comparable.
While the fixed rate on I bonds purchased this term will stay at 0.9% through their lifespan, their overall rate could go up if inflation increases again.
I bonds are considered relatively safe investments, since they're backed by the government and not as volatile as investing in the stock market or cryptocurrency. Locking in the 0.9% fixed rate now provides the assurance that the rate on I bonds will never drop below that.
What are the risks of I bonds?
If inflation drops to nothing, or prices decrease, the variable rate on I bonds could go as low as zero. The US has had two six-month periods -- ending May 2009 and May 2015 -- when prices actually went down on average. The total interest rate for I bonds at that time dropped to zero. With the current fixed rate of 0.9%, I bonds bought in the next six months will provide some interest even if inflation falls off a cliff.
As the Federal Reserve continues to raise interest rates, the returns on deposit accounts like high-yield savings accounts have moved higher as well, with some of them currently approaching 5% APY with no restrictions on withdrawing money. Stocks have given double-digit returns in recent years… but they also crashed during the last recession.
One other risk of tying your money up with I bonds is that you can't access your funds for at least a year. If emergencies or necessary purchases arise, you're out of luck. The Treasury does allow exemptions for people who've suffered natural disasters.
Similarly, if you need to redeem bonds before five years, you lose the last three months of interest earned.
Who can buy and hold Series I savings bonds?
US citizens (no matter where they live), US residents or civilian employees of the US federal government (regardless of citizenship or residence) with a Social Security number can purchase electronic or paper I bonds.
To buy electronic I bonds, you must create an online account with TreasuryDirect, which is restricted to people 18 years old and up.
You can purchase I bonds for your children or anyone else. The limit of $10,000 per year of electronic bonds is determined by the holder of the bond, not the purchaser. You can purchase I bonds for as many people as you'd like. If you have a family of four, you could buy $40,000 per year electronically (not including any paper bonds bought with tax refunds).
Corporations, LLCs, small businesses, trusts and estates can also purchase I bonds. Businesses and organizations are restricted to the same $10,000 yearly limit as individuals.
To purchase paper I bonds, you'll need to buy them with your federal tax refund, using Form 8888 or popular commercial tax software to indicate your I bond purchases up to $5,000. The paper bonds will be mailed to you about three weeks after your tax return is processed.