• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

The College Investor

Student Loans, Investing, Building Wealth

  • About
  • Podcast
  • Research
  • Contact
  • Save For College
      • How To Start

      • How To Save For College
      • How To Pay For College
      • What Is the Average Cost of College?
      • What Is A 529 Plan and Where to Open One in Your State
      • How Much Should You Have In A 529 Plan By Age
      • How To Use A 529 Plan For Private Elementary And High School
      • What Are Qualified Expenses For A 529 Plan (And What Doesn’t Count)?
      • The Best Brokers To Open A 529 Plan
      • Tools + Accounts

      • 529 Plans: The Ultimate College Savings Plan
      • 529 Plan Contribution Limits
      • Prepaid Tuition Plans | What To Know
      • Understanding And Using 529A ABLE Accounts
      • Using A Roth IRA To Save And Pay For College
      • FAFSA Deadlines for Financial Aid
      • CollegeBacker Review
      • Upromise Review
      • UNest Review
      • Other Options

      • Student Loan And Financial Aid Programs By State
      • The Guide To Military And VA Education Benefits
      • How To Fill Out The FAFSA
      • How To Find College Scholarships
      • The Best College Scholarship Search Websites
      • How To Find Grants To Pay For College
      • Pell Grants: What They Are And How To Qualify
      • Understanding Federal Work-Study
      • How To Use A 529 Plan If Your Child Doesn’t Go To College
  • Student Loans
      • Borrowing

        • How Student Loans Work
        • How To Apply For A Student Loan
        • Best Student Loans And Rates In January 2023
        • 10 Best Private Student Loans Of January 2023
        • Best Student Loans To Pay For Graduate School
        • Best Student Loans To Pay For Medical School
        • Parent Loans To Pay For College
        • No-Cosigner Student Loan Options
        • Guide To Income Sharing Agreements (ISAs)
        • Best International Student Loans
      • Get Out Of Debt

        • Best Student Loan Refinance Companies In January 2023
        • Best Student Loan Repayment Plans
        • Best Student Loan Refinancing Bonuses And Promotional Offers Of January 2023
        • Student Loan Forgiveness Programs (The Complete List)
        • The Full List Of Student Loan Forgiveness Programs By State
        • Public Service Loan Forgiveness (PSLF)
        • Top Student Loan Scams
        • Average Student Loan Monthly Payment
        • Average Student Loan Debt By Year
      • Reviews

        • Credible Review
        • Splash Review
        • Ascent Review
        • Citizens Bank Review
        • Commonbond Review
        • Earnest Review
        • ELFI Review
        • Laurel Road Review
        • LendKey Review
        • SoFi Review
  • Investing
      • How To Start

        • How To Start Investing in High School
        • How To Start Investing In College
        • How To Start Investing In Your Twenties For 22 – 29 Year Olds
        • How To Start Investing In Your 30s For 30 – 39 Year Olds
        • How To Start Investing With $100 Or Less
        • How To Give Kids The Gift Of Stock
        • What Is Dividend Growth Investing
        • IRA Rollover Chart
      • Tools + Accounts

        • Best Online Stock Brokers
        • The Best Traditional And Roth IRA Accounts
        • The Best Robo-Advisors
        • The Best Investing Apps
        • The Best Places to Trade Options
        • The Best Places To Open A Health Savings Account
        • The Best Solo 401k Providers
        • The Best Self-Directed IRA Providers Of 2023
        • Best Cryptocurrency Exchanges
      • Reviews

        • Vanguard Review
        • Fidelity Review 2023
        • M1 Finance Review
        • TD Ameritrade Review 2023
        • Charles Schwab Review
        • Robinhood Review
        • Webull Review
        • Betterment Review 2023
        • Wealthfront Review
  • Earn More Money
      • Extra Income

        • 20 Best Side Hustles You Can Start Earning With In 2023
        • 53 Side Hustle Ideas To Make Money Fast
        • 100 Ways To Make Money In College
        • 80 Ways To Make Money From Home In 2023
        • 5 Quick Money Making Ideas (That Take Less Than 1 Hour)
        • 10 Interesting Ways You Can Make Money Driving
        • High-Paying Side Gigs That Earn $1,000 or More Per Month
        • The 10 Best Money-Making Apps
        • Paid Surveys: Earn Money For Giving Your Opinion Online
        • 10 Crazy Ways To Make $10,000 You’ve Never Heard Of
      • Build Wealth

        • 40 Passive Income Ideas You Can Use To Build Wealth In 2023
        • 3 Ways To Make $50,000 Per Year Without Working With Passive Income
        • How To Become A Real Estate Investor With Just $500
        • 15 Best Online Business Ideas
        • Residual Income: 7 Super Smart Ways to Build It
        • The Most Common Multiple Income Streams
        • How To Become A Real Estate Mogul With Only $10,000
      • Reviews

        • Fundrise Review
        • RealtyMogul Review
        • FarmTogether Review
        • AcreTrader Review
        • Swagbucks Review
        • Survey Junkie Review
        • TopCashback Review
        • DoorDash Review
  • Personal Finance
      • Banking

        • 10 Best High Yield Savings Accounts Of January 2023
        • 10 Best Money Market Accounts Of January 2023
        • 10 Best Free Checking Accounts In January 2023
        • Best Bank CD Rates Of January 2023
        • 10 Best Business Checking Accounts In January 2023
        • Best Online Banks Of January 2023
        • Best Credit Unions Nationwide Of January 2023
        • Best College Student Checking Accounts Of January 2023
      • Insurance

        • Best Life Insurance Companies
        • Renters Insurance
        • Car Insurance
        • Pet Insurance
        • Umbrella Insurance
        • Disability Insurance
        • Tuition Insurance
        • Travel Insurance
      • Credit Tools

        • Best Budgeting Apps
        • Cash Advance Apps
        • How To Get A Free Credit Score Report
        • Best Credit Monitoring Services For 2023
        • Debt Settlement: Inside The Secret World
        • Credit Repair Explained: Should You Pay For Help?
        • Best Personal Loan Companies And Lenders
        • Online Loan Companies To Borrow From Home
      • Tax

        • Best Tax Software
        • Free Tax Software
        • IRS Tax Refund Calendar
        • Common IRS Questions and Errors
        • Federal Tax Brackets
        • Capital Gains Tax Brackets
        • 401k Contribution Limits
        • IRA Contribution Limits
        • HSA Contribution Limits
  • Forum
  • Search
Home » Investing » Bonds » What Is An I-Bond?

What Is An I-Bond?

Updated: December 6, 2022 By Hannah Rounds

Tweet
Share
Share
Pin
Email
Print

What Are I-Bonds?

Economists have been known to say, “There ain’t no such thing as a free lunch”—an expression that holds multiple meanings. In the world of investing, it means there's always a catch. Take for example, retirement. You may have the ability to get a tax break when you withdraw your funds, but you can’t touch it until you’re at least 59 ½ years old.

In today’s highly inflationary environment, which is compounded by the stock market tanking and real estate volatility, I-Bonds have made their way into the investing limelight, as they seem to be a way to earn solid returns with a high degree of safety. 

Even if experts are touting I bonds as a hot new investment vehicle, like all investments, I bonds carry risks and rewards. Here’s what you need to know.

Table of Contents
What is an I Bond?
What Are the Rules for Investing in I Bonds?
Pros and Cons of I Bonds
How Can I Buy I Bonds?
Are I Bonds Right For Me?

What is an I Bond?

I Bonds are a form of savings bond offered by the U.S. Department of the Treasury. When you buy an I bond, you’re investing in debt owed by the U.S. Federal government. In exchange for buying the government’s debt, they promise to repay you with interest for up to 30 years. 

While the U.S. Department of the Treasury issues many styles of bonds, I bonds are particularly appealing because they are an investment designed to protect you from inflation risk. The interest rate on the bond fluctuates with the rate of inflation. Higher measured inflation means that the interest rate on the I bond goes up. Likewise, when inflation decreases, the interest rate on an I bond decreases. 

Understanding Interest Rates on I Bonds

The Treasury has designed interest rates on I Bonds to help protect investors against inflation risk. The I Bond has two interest rate components. 

  • The fixed rate is the rate that the Treasury will pay for up to 30 years. 
  • The current fixed rate is 0.4%. 

I Bonds also pay a variable rate that adjusts every 6 months. The variable rate changes based on the measured rate of inflation. 

The 6-month rate of inflation right now is 3.24% (or 6.48% annually. Adding together the fixed rate (0.4%), the variable rate (6.48% on an annualized basis) and the effect of semi-annual compounding, the current interest rate on an I bond is 6.89%.

But your I Bonds aren’t going to pay out 6.89% for the next 30 years. This rate will adjust every six months and will generally keep pace with inflation. 

What Are the Rules for Investing in I Bonds?

With I Bond interest rates hovering around 6.89%, these bonds look incredibly appealing (especially compared to savings accounts). However, there are some limits to investing I bonds. Here are ones to consider:

Annual Limit: $10,000 per Person, Per Year

The easiest way to buy I bonds is through TreasuryDirect. You can set up and fund an account directly on the site. When you do this, you can buy up to $10,000 in bonds per person per year. Also, there’s a $25 investment minimum, which means you need to buy at least $25 in I bonds at a time. 

All U.S. citizens and legal entities can buy bonds. You can even set up custodial accounts on TreasuryDirect if you want to buy bonds on behalf of your children. 

Up To $5,000 Per Year In Bonds Bought Through Your Tax Refund

“Paper” savings bonds are bonds purchased using the proceeds of your tax refund. To buy paper savings bonds, you use IRS Form 8888 to specify how much of your refund should go to savings bonds. You can buy up to $5,000 in I bonds each year using your tax refund.

Must Hold Funds For At Least A Year

Money invested in I bonds is locked up for a minimum of 12 months from when you buy it. It’s not easily liquid at first, but after a year the money is easily accessible. 

You could even use I bonds as a part of your emergency fund. After the 12-month lockup, your I bonds can be sold at any time. If you sell them before holding them for 5 years, you will forfeit 3 months’ worth of interest.

Pros and Cons of I Bonds

Pros

  • Currently paying high rates. With negative returns in the stock market and real estate market, the guaranteed 6.89% yield on I bonds is quite appealing in today’s inflationary environment.
  • No risk of loss to inflation. Whether inflation increases or decreases, your I bond investment will keep pace with inflation.
  • Money separated from other investment accounts. TreasuryDirect Accounts are separated from other accounts by a difficult to permeate barrier. You have to be very intentional about putting money in and taking it out. This can help you avoid “emergency” vacations and instead keep your emergency funds completely separate from the rest of your money.

Cons

  • Cash is locked up for at least one year. You cannot access your investments until one year has passed. If you don’t have any extra cash, you won’t want it at TreasuryDirect.
  • Forfeit three months of interest when withdrawing funds. You can withdraw money from your TreasuryDirect account after one year of investing. But when you withdraw before a five-year minimum, you’ll forgo the last three months of interest accrued. While this isn’t a deal breaker for long-term investors, this can be a problem if you plan to move money out of TreasuryDirect every year or so.
  • No chance of beating inflation. While you’ll never lose ground to inflation, you’ll also never beat inflation with I bonds. I bonds are a great part of a “safe and secure” part of your investment portfolio. For long-run growth, you’ll need to consider assets with more growth potential such as stocks.

How Can I Buy I Bonds?

You can buy I Bonds two ways. First, you can buy up to $10,000 in I bonds each year through TreasuryDirect. Set up an account using your Social Security Number, name, current address, and other details. 

Once approved, you can transfer money into your TreasuryDirect account and buy I bonds. For further instructions follow the instructions on TreasuryDirect.

Buying paper I bonds with your tax return is a bit more complex. To do it, you need to complete  IRS Form 8888. This form allows you to allocate up to $5,000 in refund money to savings bonds.

Are I Bonds Right For Me?

Only you can decide whether I bonds have a place in your portfolio. The current yields may make them attractive. But if you’re a growth-oriented investor, I bonds may not fit in your portfolio right now. However, I bonds can serve as a cash cushion and a way to protect you from investment volatility. 

In the long run, you need a diverse range of assets to make your investment portfolio. This approach will help you succeed in every market environment. You can choose whether the inflation protection offered by I bonds makes sense given your other investment goals and priorities.

Hannah Rounds
Hannah Rounds

Hannah is a wife, mom, and described personal finance geek. She excels with spreadsheets (and puns)! She regularly explores in-depth financial topics and enjoys looking at the latest tools and trends with money.

What Is An I-Bond?

Editor: Claire Tak

Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities.
Comment Policy: We invite readers to respond with questions or comments. Comments may be held for moderation and are subject to approval. Comments are solely the opinions of their authors'. The responses in the comments below are not provided or commissioned by any advertiser. Responses have not been reviewed, approved or otherwise endorsed by any company. It is not anyone's responsibility to ensure all posts and/or questions are answered.
Subscribe
Connect with
I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree
Notify of

I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree

0 Comments
Inline Feedbacks
View all comments

Primary Sidebar

Investing Resources

Featured Broker Reviews

>  Vanguard (recommended)
>  Fidelity
>  Robinhood
>  TD Ameritrade
>  M1 Finance
>  Schwab

Featured Robo-Advisors

>  Wealthfront (recommended)
>  Betterment
>  WealthSimple
>  Vanguard Digital Advisor

Annual Contribution Limits

  • 401k Contribution And Income Limits
  • IRA Contribution and Income Limits
  • HSA Contribution and Income Limits
  • 529 Plan Contribution Limits

More On Investing

  • Best Online Stock Brokers In 2023
  • Best Brokerage and Investing Bonus Offers In January 2023
  • Best HSA (Health Savings Account) Providers Of 2023
  • 5 Best Investing Apps Of 2023
  • How To Buy Stocks Online For Free
  • The Best Robo-Advisors Of 2023
  • The Best Self-Directed IRA Providers Of 2023
  • The Best Traditional And Roth IRA Accounts Of 2023
  • Comparing The Most Popular Solo 401k Options
  • Top 3 Automatic Investment Apps Of 2023

Footer

Who We Are

The College Investor is an independent, advertising-supported financial media publisher, focusing on news, product reviews, and comparisons.

Connect

  • Contact Us
  • Advertise
  • Press & Media

About

  • About
  • Our Team
  • Podcast
  • Editorial Guidelines
  • How We Make Money
  • Archives

Social

Copyright © 2023 · The College Investor · Privacy Policy ·Terms of Service · DO NOT Sell My Personal Information

wpDiscuz