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What are I-Bonds?

What are I-Bonds?

September 02, 2022

We are getting a lot of questions about Series I Bonds these days and it’s not surprising with inflation hovering above 8%. We thought it would be helpful to share some information on what I-Bonds are and how they work.


Series I Bonds are offered directly from the Treasury. They pay a base interest rate and have a variable component that adjusts every 6 months based on the Consumer Price Index. When inflation increases the interest rate on these bonds will also increase (and vice versa).  They are yielding 9.62% at the time of writing this article.


Here are some things to be aware of when considering an investment in I-Bonds:


Purchases are limited.

Each individual can only purchase $10,000 and it must be done online through Treasury Direct.

It is possible to purchase an additional $5,000 each year per individual, however these will be paper bonds instead of electronic and they can only be purchased using your tax refund.


There’s a holding period.

Bonds must be held for a year to earn any interest and if you cash out before 5 years you will lose 3 months of accrued interest. The bonds will earn variable interest for 30 years if not cashed before they mature.


Interest is taxable.

Interest is taxable at the Federal level, but exempt from state income taxes.

You have 3 options in how you handle the taxes. First, you can defer taxes until you cash in your bonds. Second, you can pay annually by reporting the taxes on your tax return. Third, you can defer paying any tax until maturity which is 30 years from the date of purchase.


Interesting fact: If these are used for qualified educational expenses the interest is exempt from taxes.


Interest Will Vary

Interest rates on I-Bonds adjust every 6 months. With the Fed doing all they can to fight inflation, there is a high likelihood that inflation will begin to decline in the future.  I-Bonds are particularly susceptible to interest rate and opportunity risks during periods of low inflation and the rare instances of deflation. However, we believe inflation will stay elevated for an extended period, making I-Bonds an attractive low-risk investment to complement your investment portfolio. 


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