What Are I Bonds?

Chris Rykwalder is a senior investment consultant with Northwestern Mutual.

Most Americans have been feeling the pinch of inflation over the last few years. The Consumer Price Index, which measures the average change in consumer prices over time, soared to a whopping 9.1 percent in June 2022—the largest increase in four decades. Thankfully, things seem to be cooling a bit. As of September 2024, the annual CPI rate was 2.4 percent.

Inflation doesn’t just mean paying more for groceries and gas. It can also eat away at the value of your cash savings. After all, $100 will be worth more today than it will in 10 years. To earn inflation-beating returns on savings, you typically need to take more economic risk. That’s why money in a savings account won’t generate stock-like returns over time. This presents a quandary for savers who are looking to fund short-term goals, such as a wedding, college education or a new home.

Here’s the rub: An intermediate-term goal is far enough away that inflation could impact your purchasing power—but you’ll need it soon enough that risking putting your money into the markets isn’t ideal either. One option to consider as part of a broad financial plan are Series I savings bonds from the United States government. “I bonds” are an inflation-protected, lower-risk option that can help preserve the purchasing power of a portion of your savings. This is especially true when inflation is on the rise.

We’ll help you understand what I bonds are so you can decide if they have a place in your investment portfolio.

What are Series I Savings Bonds?

When you buy a Treasury bond, you’re essentially lending money to the federal government. There are two other main types of bonds:

1. Corporate bonds: Issued by companies looking to raise capital
2. Municipal bonds: Issued by state, county and local governments

Treasury bonds are fully backed by the U.S. government, so they’re considered low-risk investments. With a Series I bond, you’ll earn a composite interest rate that’s made up of a fixed rate that doesn’t change, and another rate that’s tied to inflation. The inflation-based rate changes every six months.

Throughout the bond’s life, the interest you earn is adjusted twice a year to account for inflation. For Series I bonds issued from November 1, 2024 through April 30, 2025, the composite interest rate is 3.11 percent.

Here’s what to know about I bonds

Series I bonds may have a place in your financial plan, but there are a few important things to consider before deciding whether to add them.

When you get paid from I bonds

After purchasing an I bond, the U.S. government will pay you back, with interest, when the bond matures and you cash it in. At that point, you’ll recover your purchase price (also known as the face value), along with any interest earned. It takes 30 years for an I bond to mature although there are ways to cash it in sooner. This works differently than other bonds, which make interest (coupon) payments in regular intervals during the time that you own the bond.

How to sell I bonds

You have the option to redeem an I bond after one year—but if you sell it within five years, you’ll forfeit interest earned in the three months prior to the sale. That’s an important detail. When investing in I bonds, make sure you won’t need access to that money for at least 12 months. It likely makes the most sense to hold the bond for at least five years.

Inflation rates can change

As inflation rises or falls, the composite rate will adjust accordingly every six months. But you can rest easy knowing that your composite rate of return will never be less than 0 percent, even in periods of declining prices (deflation).

I bonds are taxed differently

The good news is that interest earned on a Series I bond is shielded from state and local taxes. However, this money will be taxed at the federal level at your normal income tax rate. You’ll owe taxes when you cash in your bond, but you can also pay them annually if you choose. But the interest income isn’t always taxable. You won’t owe any federal taxes if you use I bond interest to cover certain higher education expenses.

I bonds and EE bonds are different

The federal government also offers Series EE savings bonds. Interest rates on EE bonds are fixed for at least 20 years, and they tend to be lower when compared to Series I bonds. However, the U.S. Treasury guarantees that the bond’s value will double after 20 years. Another key difference is that you can only purchase $10,000 of EE bonds per year, compared to $15,000 of I bonds.

Keep your larger financial plan in view

I bonds are an option that could fill a specific need for savers, but like any financial product, they may not be appropriate for everyone. If inflation and finances are on your mind, it may be helpful to sit down with your financial advisor. They can help you design a comprehensive plan that accounts for rising prices today and helps you find opportunities and blind spots to grow and protect your money down the road.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.