Given Rising Inflation, Some Investors Are Eyeing Series I Bonds

One of the safest ways to invest your money for the future is through U.S. Treasury Series I Savings Bonds, commonly called I bonds. If you’re looking for an inflation-proof, tax-deferred way to save for retirement, education, or emergencies, I bonds are a good investment. 

As concerns about rising inflation grow, you may want to learn a little more about I bonds, how they work, and what limits you may face if you choose to invest in treasury bonds.

Introduced by the Treasury Department in 1998, the I bond program offers a low-risk way to invest your money. The bonds earn interest over their lifetime but are protected from the volatility of inflation. 

Each calendar year, you can purchase up to $10,000 worth of I bonds as long as you’re a U.S. resident with a social security number. That limit is per person, so in a household of four people, you could buy up to $40,000 in I bonds, $10,000 for each person.

The minimum purchase required is $25. You have the option to purchase electronic or paper bonds. Paper bonds have a few more restrictions, such as a lower annual maximum purchase limit ($5,000) and set denominations of $50, $100, $200, $500, and $1,000.

With electronic I bonds, you can purchase any denomination over $25 in penny increments. For example, you could buy a bond with a $26.26 value if you wanted. 

I bonds are sold at face value, so if you buy a $25 bond it will cost you $25. 

According to the Treasury Department website, annual interest on I bonds is derived from a fixed rate and a semiannual inflation rate. The fixed rate has been zero since November 2010. Currently, the semiannual inflation rate is 1.68 percent for I bonds issued between November 2020 and April 2021. That variable rate is adjusted twice a year. 

The inflationary interest is added monthly to the I bond and paid out when you cash the bond. A big benefit of the I bond over other inflation-protected U.S. bonds such as the Treasury Inflation Protected Securities (TIPS) is that its variable interest rate never goes under 0 percent. 

You won’t be subject to state and federal income tax on the interest you earn with the I bond until you redeem the bond. You can also get out of paying taxes on that interest altogether if you use the money to pay for education purposes. 

I bonds reach full maturity after 30 years. That means after 30 years they no longer accrue so you should cash them out. 

If you purchase I bonds, you have to hold onto them for at least one year. If you want to redeem them early, you can redeem them after five years without any penalties. Redeem them before five years and you lose interest accrued in the last three months you held the bond. 

To purchase I bonds, visit the Treasury Department website, TreasuryDirect, to open an account.