What I Bonds Are and Why People Buy Them

An I Bond is a savings bond issued by the U.S. Treasury that pays interest in two parts: a fixed rate that never changes, and a variable rate that moves with inflation. You buy them through TreasuryDirect.gov for $25 to $10,000 per person per calendar year. The bond earns interest for 30 years, but you cannot cash it out penalty-free for the first year, and if you sell it between years 1 and 5, you lose the last three months of interest.

People buy I Bonds mainly because the variable portion means your money keeps pace with inflation — the rising cost of goods and services. If inflation is high, your I Bond interest rate rises with it. If inflation falls, your rate falls too, but it never goes below zero. This makes I Bonds different from regular savings accounts, where the interest rate stays fixed and can lose buying power if inflation rises.

Key Takeaways

  • I Bonds pay a fixed rate plus an inflation-adjusted rate that changes every six months, so your return depends partly on what inflation does.
  • You cannot withdraw money penalty-free for one year, and withdrawals in years 1 through 5 cost you three months of interest.
  • I Bonds make sense if you have money you will not need for at least five years and want protection against inflation eating into your savings.
  • I Bonds are backed by the U.S. government, so they carry no credit risk, but they typically pay less than stocks over long periods.
  • You buy I Bonds only through TreasuryDirect.gov, and you can hold a maximum of $10,000 per person per year (plus $5,000 more if you use your tax refund).

How the Interest Rate Works and What It Means for Your Money

The interest rate on an I Bond has two components. The fixed rate is set when you buy the bond and never changes — it applies for the entire 30-year life of the bond. The inflation rate is calculated every six months based on the Consumer Price Index (CPI), which measures how fast prices are rising. The Treasury announces new rates on May 1 and November 1 each year.

Your total interest rate is the fixed rate plus the inflation rate. If the fixed rate is 1.30% and the inflation rate is 2.40%, you earn 3.70% that six-month period. Six months later, the inflation rate recalculates, so your rate changes even though the fixed portion stays the same. This is why I Bonds are called "inflation-protected" — when inflation rises, your rate rises automatically.

The catch: if inflation turns negative (called deflation), the inflation portion of your rate can go to zero, but your total rate will never drop below zero. So in the worst case, you earn the fixed rate and nothing more. Over the past 20 years, this has never happened, but it is possible.

The Penalty for Cashing Out Early

I Bonds lock your money away longer than most savings products. If you redeem a bond less than one year after purchase, you lose all the interest you earned. If you redeem it between one and five years after purchase, you lose the last three months of interest. After five years, you can cash it out with no penalty.

This means if you buy an I Bond and need the money after two years, you will not get the interest from months 21 through 24. If you buy one and need it after 18 months, you get nothing. This structure is designed to discourage short-term trading and reward people who hold the bonds longer.

After five years, you can redeem I Bonds whenever you want without losing interest. You can also hold them for the full 30 years if you choose. Many people hold them for five to ten years as a middle ground — long enough to avoid penalties, but not so long that their money is tied up for decades.

I Bonds Versus Other Places to Put Your Money

I Bonds compete mainly with high-yield savings accounts, money market accounts, and Treasury bills. A high-yield savings account typically pays a fixed rate that changes when the Federal Reserve changes interest rates, but you can withdraw money anytime without penalty. An I Bond pays a rate that adjusts for inflation, but you cannot touch your money for a year and lose interest if you withdraw in years 1 through 5.

Treasury bills (T-bills) are short-term Treasury debt that mature in weeks or months, so they are better if you need access to your money soon. I Bonds are better if you want to lock money away for years and protect against inflation. The trade-off is access: savings accounts give you flexibility, I Bonds give you inflation protection.

Stocks and stock mutual funds have historically returned more than I Bonds over long periods — often 7% to 10% per year on average — but they also go up and down in value and can lose money in the short term. I Bonds never lose principal value, so they are lower-risk but also lower-return.

When I Bonds Make Sense for Your Situation

I Bonds work well if you have money you will not need for at least five years and you want to avoid the risk of inflation eroding your savings. They are also useful if you are nervous about stock market volatility and want something that will not drop in value. Because they are backed by the U.S. government, they carry no credit risk — you will get your money back.

I Bonds are less useful if you need access to your money within the next year, or if you are saving for something specific that might happen sooner. They are also not ideal if you are comfortable with stock market risk and have a long time horizon, because stocks have historically outpaced inflation by a wider margin.

I Bonds can be part of a mixed strategy: some money in I Bonds for safety and inflation protection, some in stocks for growth, some in a high-yield savings account for emergencies. The right mix depends on your age, how much risk you can handle, and when you will need the money.

How to Buy I Bonds and What to Know About Limits

You buy I Bonds only through TreasuryDirect.gov, the official Treasury website. You create an account, link a bank account, and purchase bonds directly. You cannot buy them through a bank or brokerage. The minimum purchase is $25, and you can buy up to $10,000 per person per calendar year. If you have a tax refund, you can buy an additional $5,000 in I Bonds using IRS Form 8888, bringing your annual limit to $15,000.

I Bonds are issued as electronic entries — you do not receive a physical certificate. They are held in your TreasuryDirect account, and you can view them online anytime. When you want to redeem them, you log into your account and request the redemption. The money is deposited into your linked bank account within a few business days.

You can hold I Bonds in your own name, or you can buy them for a child or grandchild. If you buy them for someone else, you are the owner and can redeem them anytime, but the interest is taxed to the person whose name is on the bond. Some people use I Bonds as a gift or savings tool for children because the interest grows tax-deferred until the bond is redeemed.

Tax Treatment and How It Affects Your Return

I Bond interest is subject to federal income tax, but not state or local income tax. You do not have to pay tax on the interest each year — instead, you pay tax when you redeem the bond or when it matures after 30 years. This tax deferral is one advantage over a regular savings account, where you owe tax on interest each year even if you do not withdraw it.

If you use an I Bond 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 your taxable income. This is called the Education Savings Bond Program, and it has income limits and other rules. You would need to check the Treasury website or speak with a tax professional to see if you may have access to.

Because you pay tax on the interest when you redeem the bond, your actual return is lower than the stated interest rate. If you earn 4% on an I Bond and you are in the 24% federal tax bracket, your after-tax return is closer to 3%. This is why I Bonds are often more attractive to people in lower tax brackets.

Frequently Asked Questions

Can I lose money in an I Bond?

No. I Bonds are backed by the U.S. government, and your principal is may provide. The interest rate can fall to zero if inflation turns negative, but you will never get back less than you put in. The only way to lose money is to redeem the bond within five years and forfeit interest.

What happens if I need my money before the five-year mark?

You can redeem the bond anytime after one year, but you will lose the last three months of interest. If you redeem within the first year, you lose all interest. After five years, you can redeem with no penalty. Plan to hold I Bonds for at least five years if you want to keep all the interest you earn.

How do I know what interest rate I will get?

The fixed rate is announced when you buy the bond and is locked in for 30 years. The inflation rate changes every six months based on the Consumer Price Index. You can see current rates on TreasuryDirect.gov before you buy. The rate you see is the rate you will get for the first six months.

Are I Bonds better than a savings account?

It depends on your situation. I Bonds protect against inflation and defer taxes, but you cannot access your money for a year and lose interest if you withdraw in years 1 through 5. Savings accounts let you withdraw anytime but typically pay less and you owe tax on interest each year. If you have money you will not need for five years, I Bonds often make more sense.

Can I buy I Bonds for someone else?

Yes. You can buy I Bonds in someone else's name through TreasuryDirect if you are the owner. You control when they are redeemed, but the interest is taxed to the person whose name is on the bond. This is sometimes used as a gift or savings tool for children, though there are limits on how much you can buy per person per year.