I bond rates: What are I bonds, and how do you buy them?

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• An I bond is a savings bond issued by the US Department of the Treasury. 
• Rates for I bonds issued between November 1, 2023, and April 30, 2024, have a variable rate of 5.27%. 
• Each year you can purchase up to $10,000 in electronic I bonds and up to $5,000 in paper I bonds. 

Similar to corporate organizations, the US government can issue bonds as a way to raise necessary funds. Buyers of Series I Savings Bonds, more commonly referred to as I bonds,  enjoy the security of a fixed return plus protection against inflation. 

Here's how these bonds work, whether they're a good investment, and how to buy one.

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What are I bonds?

I bonds are designed to protect your money against the corrosive effect of inflation. Unlike a regular savings bond with a fixed rate, I bond interest rates are regularly adjusted to account for the current inflation rate. 

Here's a closer look at the features of this relatively low-risk investment opportunity:

• Interest rate: The composite rate of an I bond incorporates two separate interest rates — a fixed rate of return that remains stable throughout the life of the bond and a variable inflation rate based on the Consumer Price Index (CPI) that changes twice a year. 
• Interest payments: You don't collect interest payments regularly from an I bond. Interest is earned monthly and compounded semiannually. In other words, your principal is adjusted to include new interest payments twice a year. 
• Amount: You can purchase up to $10,000 in electronic I bonds each calendar year. It's possible to get an additional $5,000 in paper I bonds each calendar year. When combined, you can purchase up to $15,000 in a calendar year. The minimum amount for an electronic or paper I bond is $25 or $50, respectively. 
• Duration: I bonds can earn interest for 30 years unless you cash them in early. You aren't allowed to cash in an I bond within one year of purchase. If you cash in an I bond two to five years out, you'll pay a penalty of three months' interest. 
• Tax benefits: Interest you earn from an I bond is taxable at the federal level, but it's not taxable on a state or local level. You have the option to pay the taxes on an annual basis, when the bond is cashed, or when the bond reaches maturity.

Is an I bond a good investment?

As with all investment choices, whether or not an I bond is a good investment depends on your financial goals and risk tolerance. 

Chris Stuart, a financial analyst and portfolio manager at Shorepoint Capital Partners, says I bonds are good for conservative investors who don't need to access their cash any time soon. "I bonds really are meant to be used as long-term investments." 

Some savers use I bonds to pay for education for themselves, a spouse, or dependents. If you choose to redeem your I bond and use the funds to pay for qualified education expenses, the interest you earn isn't taxable by the federal government.

I bonds pros and cons

Every investment opportunity has advantages and disadvantages. Here's what to know about I bonds. 

I bond frequently asked questions (FAQs)

What is the I bond rate?

For I bonds issued between November 1, 2023, and April 30, 2024 Series 1 Savings Bonds offer a variable rate of 5.27%. This I bond rate includes a fixed rate of 1.30%.

When are I bond rates set?

I bond rates are announced by the Treasury on November 1 and May 1 each year. 

How often is interest paid on an I bond?

Bonds earn interest monthly, however, interest is compounded every six months. 

How to purchase I bonds

I bonds are issued by the U.S. Department of Treasury. You can purchase up to $10,000 worth of I bonds electronically on the TreasuryDirect website. The site requires you to create an account before you get started. 

Additionally, you can purchase up to $5,000 worth of paper I bonds annually with your federal tax refund. If you want to pursue this option, you'll need to file IRS Form 8888 with your tax return and indicate an I bond as your preferred payment method. 

How to redeem I bonds

If you are holding onto an I bond, you'll want to cash it in at some point. With electronic I bonds, the process is as simple as logging onto your TreasuryDirect account. There's a link within your account to cash your bonds. Funds should arrive in your savings or checking account within two business days.

If you have a paper I bond, you'll likely need to send physical copies to Treasury Retail Securities Services with FS Form 1522. Account holders at some banks have the option to cash paper savings bonds at a branch location.

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