Should I Consider I Bonds?

October 05, 2022

If you have extra cash at the bank, shorter-term investment options such as money market funds and CDs, now provide more interesting returns than they did last year. If you have some funds you won’t need for at least one year, you might also consider Series I Savings Bonds (“I Bonds”).

What Are I Bonds?

The U.S. Federal Government issues I Bonds, which are very similar to EE Savings Bonds. While EE Savings Bonds pay a fixed return, I Bonds have a variable rate, which can be an attractive feature in a rising rate environment. I Bonds have a maturity of 30 years, comprised of an original 20-year maturity, immediately followed by a 10-year extended maturity period.

What Returns are They Paying Now?

I Bonds pay a composite rate, with a fixed component and an inflation-linked component, the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U). Interest is earned monthly and compounded semi-annually. The composite rate is adjusted twice each year, in May and November.

During August 2022, new Series I Savings Bonds were paying an initial interest rate of 9.62%. This is significantly better than most money market rates and Bank CDs, often still paying less than four percent (4.0%).

How Much Can I Invest?

The minimum purchase amount for electronic I Bonds is $25, and $50 for paper I Bonds. 

The annual limit is $10,000 per person each year. If a taxpayer is due a federal income tax refund, up to an additional $5,000 can be invested in I Bonds each year, for a total of up to $15,000.

Some Caveats

Purchases: You must purchase directly through the government’s website, and you can only sell back electronic I Bonds to the U.S. government through the same website. Paper I Bonds can be purchased by using your federal income tax refund; they may be cashed at some local financial institutions or by mail.

Liquidity: I Bonds are illiquid for the first year, with no ability to redeem early. After one year and before the fifth year, selling back the I Bond carries a penalty of three months of interest. After five years, there are no penalties related to a sale.

Taxes: I Bond interest is tax-free at the local and state level, but taxable at the federal level. If used for qualified educational expenses, the interest can also be tax-free at the federal level.

Variable Rate: Note that we are currently in a rising inflationary rate environment, which will lead to higher payments for I Bonds each six months. However, inflation could fall again in the near term, and payments on I Bonds would fall with it.

Auction Sites: Avoid purchasing a savings bond through auction sites such as eBay. Ownership is non-transferable, with the original owner’s name printed on the savings bonds; as a result, you would only be buying a fancy piece of paper.

Please reach out if you would like to discuss short-term investment options.