What I Bonds are and how they earn interest

I Bonds are savings bonds issued by the U.S. Treasury that protect your money from inflation. Unlike regular savings bonds, I Bonds earn interest in two parts: a fixed rate that stays the same for the life of the bond, and a variable rate that changes every six months based on inflation.

The inflation rate is measured by the Consumer Price Index (CPI), which the Treasury announces in May and November. When inflation goes up, your I Bond earns more. When inflation goes down, your earnings slow but never go negative — the Treasury guarantees your bond will never lose value.

You buy I Bonds through TreasuryDirect, the government's official website. You cannot buy them through a bank or broker. The minimum purchase is $25, and you can buy up to $10,000 per person per calendar year in electronic bonds (paper bonds have a separate $5,000 limit, though they are no longer sold to most buyers).

Key Takeaways

  • I Bonds earn a fixed rate plus an inflation-adjusted rate that changes twice a year, so your earnings rise when inflation rises.
  • You must hold an I Bond for at least one year before you can cash it in, and if you sell within five years you lose the last three months of interest.
  • I Bonds are backed by the U.S. government and cannot lose value, making them one of the safest places to put money.
  • You buy I Bonds only through TreasuryDirect.gov, not through banks or investment firms, and the purchase limit is $10,000 per person per year.
  • Interest on I Bonds is exempt from state and local income tax, and you can defer federal tax until you cash the bond or it matures.

How to buy I Bonds through TreasuryDirect

Go to TreasuryDirect.gov and create an account with your Social Security number, email address, and a password. You will need to verify your identity through a third-party service, which usually takes a few minutes. Once your account is set up, you can buy bonds immediately.

When you purchase, you choose whether to buy bonds for yourself or as a gift. If you buy as a gift, the recipient receives a message with a code to claim the bond into their own account. You fund the purchase from a bank account linked to your TreasuryDirect profile. The bond is issued on the first business day of the following month, so if you buy on March 15, your bond is issued April 1.

You can set up automatic monthly purchases if you want to buy bonds regularly. This is a common way to reach the $10,000 annual limit without having to remember to buy each time.

When you can cash in an I Bond and what penalties apply

You must hold an I Bond for at least one year before you can cash it in. If you sell it before five years have passed, you lose the last three months of interest — this is called the early redemption penalty. After five years, you can cash the bond with no penalty.

Once your bond reaches 30 years, it stops earning interest and the Treasury automatically cashes it. You receive the full value plus all accrued interest in your linked bank account.

The early redemption penalty is significant enough that most financial advisors suggest treating I Bonds as money you will not need for at least five years. If you think you might need the cash sooner, a high-yield savings account or money market account may be a better choice.

Tax treatment of I Bond interest

Interest earned on I Bonds is exempt from state and local income tax, which is a real advantage if you live in a high-tax state. Federal income tax is owed on the interest, but you have a choice about when to pay it.

You can report the interest each year as it accrues, or you can wait until you cash the bond to report all the interest at once. Most people choose to wait because it delays the tax bill. When you do cash the bond, you will receive a Form 1099-INT showing the total interest earned, which you report on your tax return.

There is one special tax break: if you use I Bond proceeds to pay for may have access to education expenses (tuition and fees at an accredited school), you may be able to exclude the interest from federal tax entirely. This requires meeting specific income limits and other conditions, so check IRS Publication 17 or speak with a tax professional if this applies to you.

The difference between I Bonds and other Treasury securities

The Treasury sells several types of bonds. Series EE Bonds earn a fixed rate only and do not adjust for inflation. Treasury notes and bills are shorter-term securities (from a few months to ten years) that you can buy and sell on the open market. Treasury Inflation-Protected Securities (TIPS) are longer-term bonds where the principal amount itself adjusts for inflation.

I Bonds are best for people who want inflation protection but plan to hold the bond for at least five years and do not want to trade it. If you need access to your money sooner, or if you want to buy and sell bonds on the secondary market, another Treasury security may fit better.

Unlike stocks or mutual funds, I Bonds have no market risk — you will never get less than you put in. This makes them useful for the portion of your savings you want to protect from both inflation and loss.

Current rates and how to check them

The composite rate on I Bonds changes every six months. The rate you receive depends on when you buy: bonds purchased from May through October earn one rate, and bonds purchased from November through April earn a different rate. The Treasury announces the new rates on the first business day of May and November.

You can see current and past rates on TreasuryDirect.gov under the "I Bond Rates" section. The page shows the composite rate, the fixed rate, and the inflation rate that make up the total. Rates have varied widely in recent years — they were very low during 2020 and 2021, then rose sharply as inflation increased.

Before you buy, check the current rate to understand what your money will earn. The rate is locked in for the first six months you own the bond, then it adjusts every six months after that based on the new inflation announcement.

Reasons to buy I Bonds and reasons to skip them

I Bonds make sense if you have money you will not need for at least five years, you want protection from inflation, and you are comfortable with a lower return than stocks might offer. They are also useful if you live in a high-tax state and want to avoid state income tax on the earnings.

I Bonds are not the right choice if you need access to your money within five years (because of the penalty), if you are looking for high growth, or if you want to buy and sell bonds frequently. They are also not ideal if you are in a very low tax bracket, since the tax deferral benefit matters less.

Many financial advisors suggest I Bonds as part of a balanced savings plan — enough to protect some money from inflation without putting all your savings into a single type of investment.

Frequently Asked Questions

Can I buy I Bonds for someone else as a gift?

Yes. You can buy an I Bond as a gift through TreasuryDirect. The recipient gets a message with a code to claim the bond into their own account. The bond counts toward your $10,000 annual purchase limit, not theirs, so this is a way to give money that is already invested.

What happens if I need to cash my I Bond before five years?

You can cash it after one year, but you will lose the last three months of interest. For example, if you hold the bond for two years and four months, you receive interest for only two years and one month. After five years, there is no penalty.

Do I Bonds keep up with inflation?

Yes, that is their main purpose. The inflation-adjusted portion of your rate changes every six months based on the Consumer Price Index. If inflation rises, your earnings rise. If inflation falls, your earnings fall but your bond value never decreases.

Can I lose money on an I Bond?

No. The Treasury guarantees that I Bonds will never be worth less than what you paid for them. Your principal is protected, though if you sell within five years you do lose three months of interest.

How do I access my I Bonds if I need the money?

Log into your TreasuryDirect account and request to redeem the bond. The money is transferred to your linked bank account within a few business days. You cannot redeem during the first year, and if you redeem before five years you forfeit the last three months of interest.