What are I Bonds?

Series I Savings Bonds are U.S. Savings bonds that are meant to be used as a protection from inflation. While no investment is “risk free,” these are about as close as you can get, since they are backed by the U.S. government.

 How to buy I Bonds

• I Bonds are purchased directly through the U.S. Treasury website (treasurydirect.gov/)
• They cannot be purchased by us in your brokerage account
• See our blog post for step by step instructions: How to Buy I Bonds

Purchase Limits

• Purchase limits of $10,000 per person, per year.
  • Up to additional $5,000 per year if you use your tax refund. – These additional purchases are issued as paper bonds and can later be converted to electronic if you choose.
    • NOTE: The $5,000 is per tax return, not tax payer, so a couple filing a joint tax return can only add a total of $5,000 from their refund.
  • I Bonds can be purchased for one’s children as well (children’s accounts will be linked to the parent’s TreasuryDirect account)
    • Each child has their own $10,000 limit (plus $5k tax refund) that is separate from the parents’ $10,000 limit.

How is the yield determined?

• The treasury determines a fixed rate for the bond and combines that with a rate that is tied to the inflation rate.
  • Fixed rate – the original rate determined when the bond is purchased and does not change
  • Inflation Rate – Based on the (CPI-U)
• The combined yield is recalculated every six months and compounded semi-annually
• The combined rate may fall lower than the original fixed rate if inflation is negative, however it will always be greater than zero

Earning Interest

• Interest is earned each month, but paid out in a lump sum when the bond is redeemed/matured

Liquidity

• Bonds may be cashed out after 12 months
  • If the bonds are cashed out before the end of 5 years, the total is reduced by the last three months of earned interest.
• If not cashed out early, the bond will mature in 30 years

Taxes

• Each year you will receive a form 1099-INT, since bond interest is subject to Federal Income Tax. However, no state or local tax is accrued.
• You can elect to report interest each year, or defer until you cash out the bond, give up ownership, or defer it until the bond fully matures
• Bonus: The interest is tax free if used for education (must qualify) see https://www.treasurydirect.gov/indiv/planning/plan_education.htm

Other Notes / Considerations

• Treasury Direct is not an easy website to use and navigate
• Money is tied up for at least 1 year