What Are I Bonds? I Bonds are savings bonds that are 100% backed by the U.S. federal government. They are designed to protect the value of your money from inflation. The “I” stands for inflation. The interest rate on I Bonds is directly correlated with inflation. If inflation is high, the interest rate is high. If inflation is low, the interest rate is low.I Bonds interest rate is a combination of two rates which is called the composite interest rate. It is calculated based on a fixed interest rate and an inflation-adjusted rate. The interest structure is what makes I Bonds quite unique.
The composite interest rate is a complex formula: Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
Currently, the initial interest rate on new Series I savings bonds is 6.89 percent. For I notes issued from November 2022 through the end of April 2023, the overall rate is 6.89 percent. “Every six months from the bond’s issue date, interest the bond earned in the six previous months is added to the bond’s principal value, creating a new principal value. Interest is then earned on the new principal,” the Treasury explains. You can buy I bonds at that rate through April 30, 2023.
If you purchase bonds before April. 30, you’ll get a 6.89% (annualized) return for the first six months, and then the rate will continue changing every six months based on inflation for up to 30 years. You must hold notes for at least 12 months, so be careful not to purchase them if you may need the funds within the next year. If you redeem any bonds within the first five years, you forfeit three months of interest.
How to invest?
Two options:
- Buy them in electronic form in Treasury Direct online program at TreasuryDirect, or
- Buy them in paper form using your federal income tax refund.
In a calendar year, an individual (Trust, estate, corporation, partnership and some other entities) can acquire up to $10,000 in electronic I bonds in TreasuryDirect.gov, and or up to $5,000 in paper I bonds using your federal income tax refund. Electronic I bonds come in any amount to the penny for $25 or more. Paper bonds are sold in five denominations; $50, $100, $200, $500, $1,000.
Best Time to Invest in I Bonds
Between now and April. 30, the current inflation rate component is 6.89%. Beginning May. 1, it will adjust based on inflation numbers for April to September 2023. These are reported each month under CPI-U data released by the US Bureau of Labor Statistics. For example, if you purchased a bond in April, its semiannual rate periods begin every April and October. At the beginning of the semiannual rate period in April, the most recently announced composite rate would have been the rate we announced the previous November. This rate will determine interest earnings for your bond for the next six months, through the end of September. At the beginning of the semiannual rate period in October, the most recently announced composite rate would be the rate announced the previous May. This rate will determine interest earnings for your bond through the end of the following March.
Final Thoughts
The I Bond has several pitfalls as well: I Bonds can’t be redeemed for at least 12 months, if you cash them in within the first five years, you forfeit the previous three months of interest, you can only purchase up to $10,000 per person, per year, and you can’t invest in I bonds using your IRA or other retirement savings plans. Overall, the Series I Bond is an attractive way to earn a high interest rate on an incredibly safe investment backed by the U.S. government.