I savings bonds

=Introduction=

I Savings Bonds are savings bonds issued by the U.S. Treasury. They are commonly called I bonds. I Bonds are unique because they offer inflation protection.

Note: Treasury Inflation Protected Securities (TIPS) also provide inflation protection. TIPS are considered alternatives to I Bonds. See I Bonds vs TIPS for similarities and differences between the two instruments.

=Features=


 * I bonds have two components in their return -- fixed rate and inflation rate.
 * The fixed rate is fixed for the entire life of a given I bond. The fixed rate for newly issued I bonds are updated every 6 months on May 1 and November 1.
 * The inflation component is based on the Consumer Price index and updated every 6 months for existing I bonds as well as newly issued ones.
 * Paper and electronic versions are available. Each version is limited to $5,000 per year per person. (Investors can also purchase an additional $5,000 in paper bonds for their trust.)
 * I bonds are not marketable securities, meaning that you cannot trade I bonds in the secondary market, unlike other bonds and stocks.
 * I bonds offer tax-deferral for up to 30 years.
 * I bonds cannot be redeemed during the first year, and if you redeem them within the first five years after purchase, you lose the most recent three month's interest.
 * When you redeem your I bonds, you can never get back less than you invested, even if there was a long period of negative inflation (deflation).
 * I bonds are free from state and local taxation.

=Where to Purchase=

You can buy electronic I bonds at Treasury Direct.

You can buy paper I bonds at any bank that's an agent for the Federal Reserve (most are).

You can mail your completed I bond purchase paperwork directly to the Federal Reserve Bank.

=Tax Benefits=

Tax-Deferred Growth
Interest from I bonds accumulates tax-deferred for up to 30 years, at which point the bonds simply sit while not accumulating interest any more. (That is, they do not distribute interest by themselves unlike CDs.) Once I bonds are redeemed, the interest is taxable income for federal income tax purposes but is free from state and local tax.

Tax-Free Growth for Qualified Education Expenses
If I bonds are redeemed for qualifying education expenses, the interest is completely tax free, provided certain conditions are met. According to Publication 970 (2007), Tax Benefits for Education, the tax-free redemption requires the following conditions to be met.


 * You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return.
 * Your modified adjusted gross income (MAGI) is less than $80,600 ($128,400 if married filing jointly or qualifying widow(er)). (This MAGI number is adjusted annually.)
 * Your filing status is not married filing separately.
 * The owner of the savings bonds must be at least 24 years old before the bond's issue date. The issue date is printed on the front of the savings bond.
 * The full proceeds of the savings bond redemption (both interest and principal) must be used for qualifying educational expenses.

Note that redeeming I Bonds to contribute to a 529 plan or a Coverdell education savings account is also considered a qualified education expense. See Publication 970 (2007), Tax Benefits for Education for more details.

=Use Cases=


 * If your tax-advantaged accounts are filled up with bond funds, you can "extend" your tax-advantaged accounts by purchasing I bonds. This process is somewhat similar, but not identical, to placing Treasury Inflation Protected Securities in Non-deductible Traditional IRA.  This technique is particularly useful if your tax bracket is too low to justify tax-exempt bonds in your taxable account.
 * If you are desperately looking for tax-advantaged space to place tax-inefficient assets like REIT, you can free up some of your tax-advantaged space by purchasing I bonds. Meanwhile, you can exchange a part of the bond allocation in your tax-advantaged account to a REIT fund for example.
 * If you have a tax-free growth account like a Roth IRA but no tax-deferred account like Traditional IRA, you may want to place stocks in a Roth IRA while buying I bonds in your taxable account to make the maximum use of tax-free growth in a Roth IRA.

=Caveats=

Redemption while in a high tax bracket
I bonds redeemed in a high tax bracket may have barely positive after-tax after-inflation return, especially if they are not held until the 30-year maturity date. For this reason, if you expect to be in a high tax bracket when you redeem I bonds, you may not want to purchase I bonds. Specifically, if you are in your 20's, you may be earning your peak salary 30 years from now in a high tax bracket.

0% fixed rate
Currently, the fixed rate is 0% for I bonds issued after April 30, 2008. I bonds had this 0% fixed rate for the first time in the history. This means that the after-tax after-inflation value of I Bonds purchased between May 1, 2008 and October 31, 2008, inclusive, is guaranteed to be no more than the principal. (You attain no loss if you use those I bonds for education purposes. See above.)

=Tips for buying I Bonds=

The return of I bonds has nothing to do with the day of a month in which you buy them. For this reason, it is generally a good idea to buy I Bonds at the end of a month after earning some bank interest during the month.

=Links=


 * I Savings Bonds In Depth
 * Treasury Direct
 * Savings Bond Advisor (blog)