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I Bonds Explained: Inflation-Protected Savings for Investors
I Bonds Explained: Inflation-Protected Savings for Investors
I bonds are U.S. bonds with interest rates that adjust every six months to protect purchasing power from inflation.
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What are I bonds? How I bonds work I bonds vs. EE bonds Are I bonds a good investment? How much can you make with I bonds? I bonds and taxes I bonds and taxes Are I bonds low risk? Should you buy I bonds? How to buy I bonds How to buy I bonds Best Financial Advisors Find a Financial Advisor Near You | NerdWallet How to Choose a Financial Advisor in 5 Steps 5 Best Wealth Management ServicesWhat are I bonds?
I bonds are a type of savings bond designed to protect your investment from inflation. An I bond's rate combines two different rates: a fixed interest rate and an inflation rate. The fixed interest rate remains the same throughout the bond's life. The Bureau of the Fiscal Service announces the inflation rate twice a year in May and November based on changes in the Consumer Price Index for All Urban Consumers (CPI-U) . Combining an I bond's fixed rate and inflation rate creates its composite rate, or the interest rate an I bond will earn. I bonds are offering a composite rate of 4.03% until April 30, 2026.How I bonds work
As its name suggests, inflation heavily affects an I bond. As inflation changes, the inflation rate adjusts to offset those changes to help protect your money's purchasing power. You must hold your bond for at least a year before you can cash it in There are interest rate penalties for cashing in before five years. » MORE: Track the value of a dollar over time with our inflation calculator » MORE: Brokerage firms Learn more Learn moreon Charles Schwab's website
Learn more Learn moreon E*TRADE's website
Learn more Learn moreon Vanguard's website
Learn more Learn moreon Fidelity's website
I bonds vs. EE bonds
The U.S. Treasury issues two types of savings bonds: I bonds and EE bonds. The minimum purchase for either bond is $25. Both I and EE bonds earn monthly interest that compounds semi-annually for up to 30 years. They both can be sold 12 months after purchase and ultimately mature after 20 years. However, if sold prior to the five-year mark, I and EE lose three months’ worth of interest. The main difference between I and EE bonds is their interest rate. Unlike the I bond rate, which adjusts with the Consumer Price Index to protect you from inflation, EE bonds offer a fixed rate of interest that promises to double the value of the bond if held for 20 years. Whether you’d prefer to invest in an I or EE savings bond ultimately comes down to your beliefs about how inflation and interest rates will move in the future. Here’s a summary of the similarities and differences. Savings Bond Series I Series EE Minimum purchase $25 $25 Interest rate calculation Adjusts with the Consumer Price Index. The bond will double in value by year 20. Current interest rate 4.03% 2.50% Years to maturity 30 20 Maximum purchase $15,000 per year (paper and electronic) $10,000 per year State and local taxes owed None None Federal taxes Interest earned is subject to federal income taxes. Interest earned is subject to federal income taxes.Are I bonds a good investment?
Whether I bonds are a good choice for you depends on your financial goals and timeline. I bonds can be a safe, immediate-term savings vehicle, especially in inflationary times. I bonds offer benefits such as the security of being backed by the full faith and credit of the U.S. government, state and local tax exemptions and federal tax exemptions when used to fund educational expenses. 🤓 Nerdy Tip Remember, there are penalties for withdrawing the money too soon, and interest rates are adjusted every six months.How much can you make with I bonds?
I bonds are complicated, and even though you earn a guaranteed rate for six months at a time, there's still quite a bit of calculating to arrive at your guaranteed return. For example, if you bought $10,000 worth of electronic I bonds in May 2025 (the maximum amount of electronic I bonds you can buy in one year). Your fixed rate would have been 1.10%, and your annual inflation rate would have been 2.86% (or a semi-annual inflation rate of 1.43%). Your composite rate of 3.98% is calculated as follows: [Fixed rate + (2x semi-annual inflation rate) + (fixed rate x semi-annual inflation rate)] = composite rate Or, in real numbers: [0.0110 + (2 x 0.0143) + (0.0110 x 0.0143)] = 0.0398. This composite rate of 3.98% applied to $10,000 in I bonds would earn $199 in interest over the next six months (not $398, that's because it's an annualized rate) — but you cannot cash in your bond until you've held it for a year. So why even mention the six-month take? Because your rate is only guaranteed for six months. After that, the rate can go up or down. If the interest rate of TreasuryDirect Series I Savings Bond remained the same for the second six-month period. Add the first six months of interest ($199) to your original investment of $10,000 as your new principal. You would earn the TreasuryDirect Series I Savings Bond interest rate on that new number, or $10,199, for the next six months. That will result in an additional $203 in interest for your second six-month period and a total of about $402 ($199 + $203) in interest total for a one-year period. TreasuryDirect Series I Savings Bond TreasuryDirect Series I Savings Bond At this point, you'd be able to exit the bond agreement. The problem is that if you cash in your bond before you've held it for five years, you lose the last three months of interest you earned. Interest rates probably will change over time. If you kept your $10,000 bond for 30 years, you wouldn't lose any interest to penalties, but there is no guarantee your interest rate would stay the same. This can make it difficult to know exactly how much you can make investing in I bonds over a long period — though that is true for most investments. » MORE: This savings bond calculator compares returns on I bonds » MORE: » MORE:I bonds and taxes
How I bonds are taxed
Like other investments, the interest you earn from I bonds is subject to taxes. These taxes include federal income tax (but not state or local income tax) and any federal estate, gift, and excise taxes, plus any state-level estate or inheritance taxes. When it comes to reporting your interest, you have two options: You can put off reporting the interest until the year you actually get the interest. You can report the interest every year even though you're not receiving the interest at that point.I bond tax benefits
An education tax exclusion can help you exclude all or part of your I bond interest from your gross income if you meet several conditions: You cash your I bonds the same tax year you claim the exclusion. You paid for qualified higher education expenses that same tax year for yourself, your spouse or your dependents. Your filing status is not married filing separately. Your modified adjusted gross income was less than s $114,500 if single or $179,250 if married filing jointly in 2025. You were 24 or older before your savings bonds were issued.Are I bonds low risk?
I bonds are backed by the U.S. government, and you have the added bonus of protecting your cash's purchasing power. If you're approaching a financial goal within one to five years — such as college, a wedding, surgery or retirement — and are worried about the effects of inflation, I bonds could be something to consider. It's generally a good idea to shift your investment portfolio toward less risky investments as you get closer to your goal. You may not want to risk your hard-earned money when you're close to needing it. If you're considering how I bonds could affect your portfolio, it may be wise to speak with a financial advisor. » MORE: How to choose a financial advisor » MORE: How to choose a financial advisorShould you buy I bonds?
"I bonds are a good place to park some cash that you will need in the intermediate term (one to five years). For example, placing cash in I bonds that you will use for a down payment in a couple of years makes a lot of sense," said Kenneth Chavis, a certified financial planner and senior wealth advisor at Versant Capital Management in Phoenix, Arizona, in an email interview. If you're investing for a long time frame, on the other hand, you might want most of your portfolio allocated toward stocks instead. Buying and holding stocks or stock funds is one proven strategy for growing your money long-term. Keep in mind, I bonds may not be as convenient to buy and manage as other securities. While many investors turn to bond exchange-traded funds (ETFs) for quick and easy diversification, I bonds are only bought and sold through the U.S. government via TreasuryDirect, not on secondary markets through brokers. » MORE: How bond ladders work » MORE:Earn 3.75% APY by investing in U.S. Treasury Bills*
3.75*Rate when held to maturity. Rate shown is subject to price fluctuations.