I Bonds are a type of U.S. government savings bond designed to protect investors from inflation. They offer a combination of a fixed interest rate and a variable rate that adjusts with inflation, ensuring that the bond’s value keeps pace with rising prices. This structure helps preserve the purchasing power of your investment over time.
How Do I Bonds Work?
The interest rate on I Bonds consists of two components:
- Fixed Rate: This rate remains constant for the life of the bond and is determined at the time of purchase.
- Variable Rate: This rate changes every six months, based on the inflation rate as measured by the Consumer Price Index for All Urban Consumers (CPI-U).
Every six months, the U.S. Department of the Treasury updates the variable rate to reflect changes in inflation. The composite interest rate is calculated using both the fixed and variable rates, ensuring that your investment grows in line with inflation.
Benefits of I Bonds
I Bonds offer several advantages:
- Inflation Protection: The variable rate component adjusts with inflation, helping to maintain the bond’s purchasing power.
- Tax Advantages: Interest earned on I Bonds is exempt from state and local taxes. Additionally, federal taxes can be deferred until the bond is redeemed or reaches final maturity. If the bond is used for qualified higher education expenses, the interest may be entirely tax-free.
- Low Risk: Backed by the U.S. government, I Bonds are considered a safe investment with minimal risk to principal.
Purchasing I Bonds
As of January 1, 2025, I Bonds are available for purchase exclusively in electronic form through the TreasuryDirect website. The option to buy paper I Bonds using tax refunds has been discontinued due to low participation and efficiency concerns.
Purchase Limits
Individuals can buy up to $10,000 in electronic I Bonds per calendar year. This limit applies to the Social Security Number or Employer Identification Number of the first-named registrant in individual accounts.
How to Buy
To purchase I Bonds:
- Create a TreasuryDirect Account: Visit the TreasuryDirect website and set up an account.
- Select I Bonds: Once your account is established, navigate to the section for purchasing savings bonds and choose I Bonds.
- Enter Purchase Details: Specify the amount you wish to invest (up to the annual limit) and provide the necessary payment information.
- Complete the Transaction: Review your order and submit it. Electronic I Bonds are typically issued immediately and can be viewed in your TreasuryDirect account.
Considerations Before Investing
Before investing in I Bonds, consider the following:
Holding Period: I Bonds must be held for at least one year before they can be redeemed. If redeemed within the first five years, the last three months of interest are forfeited. After five years, the bond can be redeemed at any time without penalty.
Interest Accrual: Interest on I Bonds accrues monthly and is compounded semiannually. However, you won’t receive the interest until you redeem the bond.
Tax Reporting: While interest is exempt from state and local taxes, it is subject to federal tax. You can choose to report the interest annually or defer it until the bond is redeemed or reaches maturity. Using the bond for qualified higher education expenses may allow you to avoid federal taxes on the interest.
Conclusion
I Bonds are a safe and effective investment for those looking to protect their savings from inflation while benefiting from low risk and tax advantages. Their unique structure, combining a fixed rate and an inflation-adjusted variable rate, makes them an appealing choice for conservative investors. Purchasing I Bonds through TreasuryDirect is simple, and their long-term nature encourages strategic planning for inflation protection. Whether you are new to investing or looking to diversify your portfolio, I Bonds provide a reliable option to secure the value of your money over time. By understanding their features and considering your personal financial goals, you can make the most of this government-backed investment.
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