I Savings Bonds are inflation-protected savings certificates issued by the U.S. Treasury

An I Savings Bond (the "I" stands for inflation) is a government savings bond that pays interest in two parts: a fixed rate that never changes, plus a variable rate that adjusts every six months based on inflation. You buy the bond from TreasuryDirect.gov for its face value — $25 to $10,000 per purchase — and the Treasury holds it in an electronic account. The bond earns interest monthly, but you cannot cash it out for one year, and if you cash it before five years have passed, you lose the last three months of interest as a penalty.

I Bonds are designed for people who want to protect their savings from losing buying power when prices rise. Because the interest rate moves with inflation, your money grows faster when inflation is high and slower when inflation is low. This makes them different from regular savings accounts or CDs, where the interest rate stays fixed regardless of what happens to prices.

Key Takeaways

  • I Bonds earn a combined interest rate made up of a permanent fixed rate plus an inflation rate that changes every six months.
  • You must hold an I Bond for at least one year before you can cash it, and cashing it before five years costs you three months of interest.
  • You can buy up to $10,000 per calendar year through TreasuryDirect.gov, plus an additional $5,000 if you use your tax refund.
  • Interest compounds monthly and is paid when you redeem the bond, not sent to you as a check or deposit.
  • I Bonds are backed by the U.S. government and carry no credit risk, making them one of the safest places to put money.

How the interest rate is calculated

The interest rate on an I Bond has two components. The fixed rate is set when you buy the bond and never changes for the entire time you own it. The inflation rate is based on the Consumer Price Index (CPI-U), which measures how much prices have risen, and it resets every six months — in May and November. The Treasury adds these two rates together to get your combined rate for the next six months.

For example, if you buy an I Bond when the fixed rate is 1.06% and the inflation rate is 2.40%, your combined rate for the first six months is 3.46%. When the inflation rate resets in six months, your combined rate might become 1.06% plus a new inflation rate. The fixed rate stays 1.06% forever, but the inflation portion changes twice a year.

You can see the current fixed rate and the current inflation rate on TreasuryDirect.gov before you buy. The rates change on the first business day of May and November each year. If you buy an I Bond on May 1st or later, you get the new rates; if you buy before May 1st, you get the old rates.

Purchase limits and where to buy

You can buy I Bonds only through TreasuryDirect.gov, the official U.S. Treasury website. You cannot buy them from a bank or broker. You must create a TreasuryDirect account, verify your identity, and link a bank account for purchases and redemptions.

The annual purchase limit is $10,000 per person per calendar year in electronic bonds. If you receive a federal tax refund, you can buy an additional $5,000 in paper I Bonds using IRS Form 8888, which directs part of your refund to the Treasury instead of your bank account. This $5,000 is separate from your $10,000 electronic limit, so you can own up to $15,000 in I Bonds per year if you use both methods.

These limits reset on January 1st each year. If you buy $10,000 in January, you cannot buy more until the following January, even if you redeem some bonds in the meantime.

When you can cash out and what it costs

You must hold an I Bond for at least one year before you can redeem it. If you try to cash it out before one year has passed, the Treasury will not allow it. After one year, you can redeem at any time, but there is a penalty: you lose the last three months of interest.

If you hold the bond for five years or longer, you avoid the penalty and receive all the interest you earned. Most financial advisors suggest treating I Bonds as a five-year commitment to avoid losing that interest. After five years, you can redeem whenever you want without penalty, though you can keep the bond longer if you choose — I Bonds stop earning interest after 30 years.

When you redeem, the Treasury deposits the money into your linked bank account. There is no fee to redeem, and the transaction usually takes a few business days to complete.

Tax treatment and reporting

I Bond interest is subject to federal income tax, but not state or local income tax. You do not pay the tax when the bond earns the interest — you pay it when you redeem the bond. At that point, you owe federal tax on all the interest you earned over the entire time you held it.

When you redeem, TreasuryDirect will send you a Form 1099-INT showing the interest earned. You report this on your federal tax return for the year you cashed the bond. If you hold the bond for multiple years, all the interest is taxed in the year you redeem, not spread across the years you earned it.

There is one exception: if you use I Bond proceeds to pay for may have access to education expenses (tuition and fees at an accredited school), you may be able to exclude some or all of the interest from federal tax. This requires meeting income limits and other conditions, and you must report it on Form 8815.

I Bonds versus other savings options

I Bonds protect against inflation, but they come with a trade-off: you cannot access your money for a year, and you lose interest if you need it before five years. A high-yield savings account lets you withdraw anytime with no penalty, but the interest rate is fixed and does not rise with inflation. A CD offers a higher fixed rate than most savings accounts but locks your money away for a set term (three months to five years), and early withdrawal costs a penalty.

If inflation is high and you do not expect to need the money for at least five years, I Bonds can be a strong choice because they protect your purchasing power. If you need liquidity or expect to withdraw within a year, a high-yield savings account is safer. If you want a may provide rate and do not mind inflation risk, a CD may work better.

Frequently Asked Questions

Can I buy I Bonds for someone else, like a child?

Yes. You can buy an I Bond and register it in someone else's name if you have their Social Security number and they are a U.S. citizen or resident alien. The person whose name is on the bond is the owner and will owe tax on the interest when it is redeemed. Parents often buy I Bonds for children as a long-term savings tool.

What happens if inflation goes negative?

If the inflation rate falls below zero (deflation), the combined rate cannot drop below 0.00%. The Treasury sets a floor so your rate never goes negative, meaning you will always earn at least the fixed rate, even if prices fall. This protects you from earning nothing.

Can I sell an I Bond before maturity?

No. I Bonds cannot be sold or transferred to another person. You can only redeem them back to the Treasury for cash. Once you own an I Bond, only you can cash it in, and only through TreasuryDirect.

Do I Bonds earn interest if I do not cash them out?

Yes. Interest accrues and compounds monthly whether you redeem the bond or not. When you finally cash it in, you receive the full amount plus all the interest earned, minus the three-month penalty if you redeemed before five years.

What if I need the money before one year is up?

You cannot redeem an I Bond before one year has passed — the Treasury will not allow it. If you need emergency funds, you should keep money in a savings account or money market account instead. I Bonds are meant for money you can afford to lock away for at least a year.