I savings bonds
Series I Savings Bonds (often called I Bonds) are government savings bonds issued by the U.S. Treasury that offer inflation protection. I Bonds offer tax-deferral for up to 30 years and are free from state and local taxation. I Bonds are not marketable securities and cannot be traded in the secondary market.
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.
I bonds were first issued in September, 1998. Historical interest rates, along with computation metrics, for I bond issues can be found at TreasuryDirect.
Rates and terms
I Bonds have two components that make up their composite rate (total yield): a fixed rate and an inflation rate.
- The fixed rate is fixed for the entire life of any given I Bond. The fixed rate for newly-issued I Bonds is announced on May 1 and November 1 of each year, and applies to all I Bonds issued during that six month period.
- The inflation rate is based on the Consumer Price Index and is also announced every six months, on May 1 and November 1. The May rate is based on the change in the CPI-U from the previous September to March and the November rate on the change from March to September. This inflation adjustment applies to both existing I Bonds and newly-issued ones, but the timing of that adjustment is dependent on the original issue date of any particular I Bond.
The composite rate can never go below zero, which protects investors in times of deflation.
Interest accrues monthly and compounds semiannually. The accrual date is the first of the month, and the redemption value does not change between accrual dates. This means that on each 6th month anniversary of the issue date the value of the bond is increased by the interest earned during that 6 month period. However, until the bond is owned for 5 years, the value of the bond is reduced by the latest 3 months worth of interest which is a penalty for selling early. After 5 years of ownership there is no penalty and the full value of interest earned is included in the bond value shown on the Treasury Direct site. An additional restriction is that the bond may not be redeemed until it has been held for 12 months.
Six-month cycle of composite earnings rates
I Bond interest is calculated in six month cycles, based on the original date of issue. Each I Bond's composite rate (fixed and inflation) remains in effect for a total of six months, and then changes to a combination of that I Bond's fixed rate plus the most recently announced inflation adjustment for the next six months. That cycle continues for the life of an I Bond:
|Month of Issue||New Rate Takes Effect*|
|January||January 1Nov and July 1May|
|February||February 1Nov and August 1May|
|March||March 1Nov and September 1May|
|April||April 1Nov and October 1May|
|May||May 1May and November 1Nov|
|June||June 1May and December 1Nov|
|July||July 1May and January 1Nov|
|August||August 1May and February 1Nov|
|September||September 1May and March 1Nov|
|October||October 1May and April 1Nov|
|November||November 1Nov and May 1May|
|December||December 1Nov and June 1May|
|*The most recent inflation adjustment is added to the bond's fixed rate on these dates.|
May: Uses the 6 month inflation rate announced for May
An example of the composite rate calculation using I bonds issued May 2009 - Oct. 2009:
- Given a Fixed rate = 0.10% and a Semiannual inflation rate = -2.78%
- Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
- Composite rate = [0.0010 + (2 × -0.0278) + (0.0010 × -0.0278)]
- Composite rate = [0.0010 + (-0.0556) + (-0.0000278)]
- Composite rate = [-0.0546278]
- Composite rate = -0.0546
- Composite rate = -5.46%
- Composite rate = 0.00% (Composite rates are never less than zero)
How the formula works
If the inflation rate during the six months the composite rate applies is the same as the inflation rate from the previous period used in the computation of the composite rate, the pre-tax real return is the fixed rate. Example: assume a fixed rate of 1% and a semi-annual inflation rate of 1.5%. The composite rate = [.01 + (2 × .015) + (.01 × .015)] = .04015. After six months, $1 invested in the I bond is worth
- (1 + .04015/2) = 1.020075, and what used to cost $1 now costs 1.015 after inflation.
Before, $1 would buy 1.0 item that cost $1. Now you have $1.020075, but the item now costs $1.015. You can now buy
- 1.020075/1.015 = 1.005 items, 0.5% more than before.
Your real return for the six months is 0.5%. This produces an annual real return of 1.0% (the fixed rate), compounded every six months (the actual real return after one year is greater than 1.0% because of the compounding).
How interest is calculated
All bond values are based on the $25 bond. A $5000 bond is worth 200 times what a $25 bond is worth; a $100 bond is worth 4 times what a $25 bond is worth. If you have a $80 electronic bond at TreasuryDirect, it is worth 3.2 $25 bonds. The $25 bond value is always rounded to the nearest penny. Thus, a $5000 bond must always have a value that is a multiple of $2.00.
Interest is computed on a $25 bond using the composite rate divided by 2 for the given six month period. For individual months within the six month period, interest is computed using pseudo-monthly compounding to produce the same result after six months. For example, if the composite rate is 2.57%, the bond value after
- 1 month is $25 × (1 + 0.0257/2)^(1/6) = $25.05, and after
- 4 months is $25 × (1 + 0.0257/2)^(4/6) = $25.21, and after
- 6 months is $25 × (1 + 0.0257/2)^(6/6) = $25.32.
The values of a $100 bond would be $100.20, $100.84, and $101.28 after those same time periods. Note that this ignores the 3 month penalty for redemption within the first 5 years and the restriction on redemption within the first year.
Current interest rates and I Bond value
To find out the current interest rate of I Bonds and the worth of your bonds, the following resources of TreasuryDirect may be used:
Purchase and redemption
As of January 1, 2012, paper savings bonds are no longer sold. This action supports Treasury’s goal to increase the number of electronic transactions with citizens and businesses. See the press release.
Those currently holding paper savings bonds can continue to redeem them at financial institutions. Bonds which have not matured, but were lost, stolen or destroyed, can be reissued in paper or electronic form.Series I paper savings bonds remain available for purchase using part or all of one's tax refund.
I Bonds are sold at face value; for example, you would pay $100 for a $100 I Bond. I Bonds are not marketable securities, meaning that, unlike other bonds and stocks, you cannot trade I Bonds in the secondary market.
- Electronic I Bonds - You can buy electronic I Bonds at TreasuryDirect. Purchases may be made in amounts of $25 or more, to the penny.
- Purchase limits - $10,000 maximum purchase in one calendar year per Social Security Number, with an additional $5,000 in paper I Bonds per Social Security number using your IRS tax refund. Savings bonds purchased as gifts aren't included in your annual limit.
- Paper I Bonds - Paper I Bonds may be replaced if they are lost, stolen, mutilated, or never received.[note 1]
Purchasing with your IRS tax refund
You can purchase an additional $5,000 in paper I Bonds per return using your IRS tax refund. The bonds are purchased in multiples of $50, for up to 3 different registrations.
If your refund is less than $5,000, yet you still want the additional $5,000 in paper bonds for a given tax year, the following options may be open to you:
- Send an estimated tax payment with form 1040-ES before filing your tax return such that your refund ends up being at least $5,000. This will bring the amount you receive as a refund up to the required $5,000. However, note that there is a "due date" for form 1040-ES, usually the end of January the following year.
- Send a tax payment with form 4868 (request to file an automatic extension) such that your total refund will be at least $5,000. This may be submitted up to April 15th.
If you purchase paper I Bonds, you may convert any or all of these paper bonds to electronic bonds. This conversion does not apply to your annual purchase limit of $10,000 in electronic I-Bonds (see quote on the side from the IRS website).
"There is no limit on how many previously-issued paper bonds can be converted to electronic securities in your TreasuryDirect account in a single year."
"To redeem electronic bonds purchased in TreasuryDirect, log in and follow the on-screen directions. Your checking or savings account will be credited with the redemption amount within one business day of the redemption date.
You can cash your I Bonds at most local financial institutions. Treasury doesn’t maintain a listing of local banks that redeem bonds, so check with the banks in your area. When you present the bonds, you’ll be asked to establish your identity. You can do this by:
If you're not listed as the owner or co-owner on the bonds you're redeeming, you'll have to establish that you're entitled to redeem the bonds. It's always a good idea to check with your financial institution before presenting the bonds for payment to find out what identification and other documents you need. "
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 months' 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).
Interest from I Bonds accumulates tax-deferred for up to 30 years. (I Bonds do not distribute interest like CDs and other bonds do.) After 30 years, the I Bonds reach final maturity and no longer earn any additional interest. When I Bonds mature or are redeemed, the interest is taxable income for federal income tax purposes, but is free from state and local taxation. However, if the entire proceeds of the I Bond redemption (both principal and interest) are used for qualifying educational expenses, the interest can be tax-free at the federal level (see below). You also have the choice of paying income taxes on the accrued interest each year (which may be advantageous if a bond is titled in a child's name).
Both "redemption" and "maturity" of savings bonds are taxable events, whichever occurs first is when the bond is taxed.
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 (2009), Tax Benefits for Education, the tax-free redemption requires the following conditions to be met:
- You pay qualified educational 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 $84,950 for single taxpayers ($134,900 if married filing jointly or qualifying widow(er)). The amount of your interest exclusion is gradually reduced (phased out) if your modified adjusted gross income is between $69,950 and $84,950 (between $104,900 and $134,900 if your filing status is married filing jointly or qualifying widow(er)). You cannot exclude any of the interest if your modified adjusted gross income is equal to or more than the upper limit.The phaseout, if any, is figured for you when you fill out Form 8815. The MAGI numbers are 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 educational expense. To take advantage of this, file IRS Form 8815 to claim an exclusion for the interest after rolling the proceeds of these US Savings Bonds into a section 529 college savings plan or Coverdell Education Savings account. Write "529 College Savings Plan" or "Coverdell Education Savings Account" in the answer to 1(b), where it asks for the name of the educational institution. . Note that there are certain restrictions, such as the fact that the child beneficiary cannot be listed as a co-owner on the bonds. See Publication 970 (2009), Tax Benefits for Education for more details.
Modified AGI Limits
As of 2013, for all other filing statuses, your interest exclusion is phased out if your modified AGI is between $72,850 and $87,850 (filing single) or between $109,250 and $139,250 (married filing jointly) . You cannot take the exclusion if your modified AGI is above those limits. You are disqualified from the interest exclusion if you are married filing separately. For more information, see chapter 11 in Publication 970, Tax Benefits for Education.
If one expects to be above the MAGI levels the following year, it may be prudent to use I-Bonds for qualified educational expenses (such as using them to fund a 529 plan) in the current year, to avoid paying taxes on the interest.
Role in a portfolio
- If your tax-advantaged accounts are filled up with bond funds, you can "extend" your tax-advantaged accounts by purchasing I Bonds in your taxable account. This process is somewhat similar, but not identical, to placing Treasury Inflation Protected Securities in your Non-deductible Traditional IRA. Buying I Bonds in your taxable account is particularly useful if your tax bracket is too low to justify owning tax-exempt bonds in your taxable account.
- If you are desperately looking for tax-advantaged space to hold tax-inefficient assets like REITs, you can free up some of your tax-advantaged space by purchasing I Bonds in your taxable account and then exchanging a part of the bond allocation in your tax-advantaged account to a REIT fund.
- If you have a tax-free growth account like a Roth IRA, but no tax-deferred account like a Traditional IRA, you may want to place stocks in the Roth IRA while buying I Bonds in your taxable account to make the maximum use of the tax-free growth in the Roth IRA.
- I-bonds older than 1 year can serve as an emergency fund if you can absorb the 3-month interest penalty; otherwise I-bonds at least 5 years old serve as an emergency fund just fine. The yield can at times be higher than money market funds or bank savings accounts.
Redemption while in a high tax bracket
I Bonds redeemed when the investor is in a high tax bracket may provide little or no positive after-tax, after-inflation return, especially if they are held for shorter periods of time. For this reason, if you expect to be in a high tax bracket when you redeem your I Bonds, they may not be a suitable investment for you. Specifically, if you are in your 20s, in 30 years you may well be in your peak earning years, which means you would probably be in a high tax bracket when the bonds mature.
To illustrate the point, here is the after-tax, after-inflation value of $1 invested in I bonds compounded for 30 years (60 semi-annual periods) with 3% inflation and a 1% fixed rate and then redeemed in the 35% federal income tax bracket:
- (1 + ((1 + 0.04015/2)^60 - 1) × (1 - 0.35)) / (1.03^30) = $1.02671191
- where 0.04015 is the composite rate (.01 + (2 × .015) + (.01 × .015) = .04015) and 0.0415/2 is the rate that is compounded every 6 months (60 times in 30 years)
This is equivalent to a real after-tax return of 0.088%/year.
Tips for buying I Bonds
Since I Bonds earn the full month's interest if you own them on the last day of that month, it is generally a good idea to buy I Bonds at the end of a month after also earning interest on that same money in a bank account during most of that same month. Conversely, you would want to redeem your I Bonds at the beginning of any month, since holding them until later in the month will not earn any additional interest, unless you own them on the last day of the month.
Buying paper I bonds at a bank
|Note: As of January 1, 2012, paper savings bonds will no longer be sold at financial institutions.|
Those currently holding paper savings bonds can continue to redeem them at financial institutions. Bonds, which have not matured, but were lost, stolen or destroyed, can be reissued in paper or electronic form.[note 1]
Gallery of Ibond images
One may find the images below useful when it comes to recognizing a paper Ibond. These images may prove helpful to beneficiaries in the task of locating a deceased person's assets.
- The process for replacing paper I bonds can be found at TreasuryDirect.gov: Individual - Replacing or Reissuing a Paper I Bond
- Nov 2009 TreasuryDirect Press Release Announcing the New Rates
- 31 CFR 359.3
- I Savings Bonds Rates & Terms
- I and EE Savings Bond Comparison, from TreasuryDirect.gov.
- Purchase Limits, from TreasuryDirect.gov.
- Form 8888, Allocation of Refund (Including Savings Bond Purchases), from the IRS
- Re: Philly Chapter meeting - 9 Nov 2013, forum discussion, direct link to post.
- According to Series I Savings Bonds Tax Considerations.
- FinAid Section 529 Plans
- Education Planning, from TreasuryDirect.
- Inflation Is Back And So Are I Bonds, The Bogleheads® view article on Forbes (published 5/13/2011)
- Risk-Free Yield? Consider I Bonds, The Bogleheads® view article on Forbes (Part 1 of 4)
- The ABCs Of Risk-Free I Bonds, The Bogleheads® view article on Forbes (Part 2 of 4)
- I Bonds: The College Tax Break, The Bogleheads® view article on Forbes (Part 3 of 4)
- Let Us Buy More I Bonds, The Bogleheads® view article on Forbes (Part 4 of 4)
- Treasury Direct - I Savings Bonds In Depth
- Treasury Direct: Learn More About Entity Accounts
- Form 8888, Allocation of Refund (Including Savings Bond Purchases), from the IRS
- Savings Bond Advisor
- Wiki Update: Calculating I Bond Interest, forum discussion.
- I Bond Growth in Value, by forum member #Cruncher. Links to pages for every I Bond issued. See: I-Bonds help
- Ask Kantro: How Do I Roll Over US Savings Bonds into a 529 College Savings Plan?