If you’re looking for a safe investment that pays a higher interest rate than savings accounts or CDs and protects you from rising inflation, Series I bonds could be just what you need.
These products have garnered a lot of attention recently, given rising inflation, and for good reason. Used correctly, they can be a powerful piece of your savings plan.
What are Series I bonds?
Series I bonds are savings vehicles issued by the U.S. government. Similar to a Treasury bill, you are loaning money to the government and earning interest in return.
The key feature of Series I bonds is the inflation protection they offer. When inflation is high, your interest rate increases, ensuring that the actual purchasing power of your savings is secure.
“We saw what happened recently with the Fed,” says Brennan Zizzi, CFP, Co-Founder of Zizzi Investments in Mechanicsburg, PA. “It took them a while to raise rates on short-term cash vehicles, so while inflation was running hot back in 2021 and 2022, you were getting an 8%-9% clip on these while the Fed rates were not where they are now.”
Series I bonds are also similar to savings accounts and CDs in that the value of your investment will never decline. That safety, combined with inflation protection, can make them a valuable part of your savings plan.
“I like these for medium-term goals, where maybe you’re planning on buying a house or putting money towards college education in a few years,” says Sara Stanich, CFP, CDFA, CEPA, Founder of Cultivating Wealth in Montauk, NY. “It’s safe and it has a good rate of return, better than what you can get in a savings account.”
How do Series I savings bonds work?
Similar to CDs, Series I bonds require you to keep your money invested for an extended period of time to get the maximum benefit.
All Series I bonds have a 30-year maturity. You cannot redeem them sooner than 12 months after purchase, and there is a penalty of 3 months’ worth of interest if you redeem it before five years have passed.
“For anything less than a year out, I’m not going to be looking at these,” says Zizzi. “But when inflation is high and other rates are low, even if you redeem it before five years and lose three months, you’re still getting a great return.”
The interest rate paid by Series I bonds has two components: a fixed rate and an inflation rate.
The fixed rate remains the same for the life of the bond. It is set every six months on May 1 and November 1 and applies to all Series I bonds purchased within those six months. At time of publication, the fixed rate is set at 1.30%.
The inflation rate varies over the life of the bond. It resets every six months, also on May 1 and November 1, based on the Consumer Price Index for All Urban Consumers (CPI-U), meaning that it increases when inflation is high and decreases when inflation is low. As of November 2023, the 6-month inflation rate is set at 1.97%.
The combined interest rate that you earn is called the composite rate and is calculated using the following formula: [Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]. The composite rate for Series I bonds issued between November 2023 and April 2024 is 5.27%. Over the past 25 years, the composite rate at issue has ranged from 0% in 2015 to 9.62% in 2022.
Your composite rate will vary over the life of your Series I savings bond as the inflation rate adjusts, but it will never drop below 0%. And the higher inflation gets, the more you will earn.
“Rates have dipped a little bit but it still far exceeds any guaranteed bank or money market rate that you can get,” says Stanich. “And it’s guaranteed by the U.S. government, so it’s an extremely safe investment.”
The interest you earn on Series I bonds is free from state and local taxes, but it is subject to federal income tax as well as estate, gift, and inheritance taxes. If you use your proceeds on qualified higher education expenses in the same year you redeem your bond, the interest can also be excluded from your federal income tax return.
“If you're in a high income bracket and you've been able to sock away ten thousand a year for your child's education, being able to redeem all of that interest tax-free is huge,” says Zizzi. “And the other nice thing there is that they add flexibility. So if you don't need it all for education, it's not going to waste.”
With Series I bonds, you can choose how you pay taxes. You can either report the interest earned each year and pay taxes as you go, or you can defer taxes until the year in which you redeem the bond. You can even change which method you’re using as you go along, though you’ll need to complete IRS Form 3115 if you’re switching from reporting every year to deferring until redemption.
When do Series I bonds pay interest?
Series I bonds are zero coupon bonds, meaning interest isn’t paid until you redeem the bond. Instead, the interest you earn is added to the value of the bond, which then earns more interest moving forward.
Interest is earned monthly, but compounding is done semi-annually. This means that every six months, the interest earned is added to the value of your bond. From that point forward, interest is earned on that new, higher bond value.
When you redeem the bond, whether at maturity or earlier, you collect both your initial investment and all of the interest earned.
When do Series I bonds mature?
Series I bonds mature after 30 years. This includes an initial 20-year maturity period, followed by an automatic 10-year extended maturity if the bond hasn’t already been redeemed.
With digital Series I bonds (see below for more detail), the redemption value is automatically deposited into your account with TreasuryDirect at maturity.
With paper bonds, you have to redeem the bond manually. You can do this through TreasuryDirect by completing FS Form 1522, or you can check with your local bank to see if they can redeem the bond for you.
How to buy Series I bonds
There are two ways to buy Series I bonds.
One way is to buy paper bonds with your tax refund. Using Form 8888, you can buy anywhere from $50 to $5,000 worth of Series I bonds per person, per year. You can even use your tax refund to buy them for other people, such as your children.
However, buying digital Series I bonds through the TreasuryDirect website is more common. This allows you to track exactly how much your bonds are worth at any given time.
“Buying them through the TreasuryDirect website is going to be easier for most people,” says Stanich. “They’re already accessing all of their other accounts online, so this just adds to the list.”
Here’s how to buy a Series I bond through the website.
1. Open a TreasuryDirect.gov Account
Go to https://www.treasurydirect.gov and click “Log In” if you already have an account, or “Open a New Account” if this is your first time registering.
To open a new account, you’ll need the following:
- A taxpayer identification number (this could be an SSN or an EIN).
- An address of record within the U.S.
- A checking or savings account
- An email address
- Personal information for the person or company for whom you are registering the account, such as name, birthdate, etc.
2. Choose BuyDirect
Once you have your account, you can log in and choose “BuyDirect”. Then you can confirm that you’re buying Series I bonds and click “Submit”.
3. Complete the Rest of the Application
The last step is confirming the value of the bond you’d like to purchase and how it will be registered.
For digital Series I bonds purchased through TreasuryDirect, you can purchase any amount from $25 to $10,000 per year, per tax identification number. If you are gifting the bond to someone else, that amount counts under their SSN.
You can register the bond under a single owner, an owner with a beneficiary, or two co-owners.
Frequently asked questions about Series I bonds
Are Series I savings bonds taxable?
Interest from Series I bonds is subject to federal taxes, but not state or local taxes. You can avoid federal taxes as well if the proceeds are used for qualified education expenses in the year in which you redeem the bond.
Are Series I bonds a good investment?
Series I bonds can be a great way to earn a higher interest rate than savings accounts and CDs over short to medium periods, while still maintaining the same level of safety. Over long periods, you are likely to earn higher returns from a diversified portfolio of stocks and bonds.
How long do you have to hold Series I bonds?
You have to hold Series I bonds for at least one year. If you redeem your bond earlier than five years after purchase, there is a penalty of three months’ worth of interest. They reach maturity after 30 years.
