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8 Things to Know About I Bonds  Thumbnail

8 Things to Know About I Bonds

With rising inflation rates, people continue to voice interest in I Bonds, as a hedge against the rising rates.  Let’s take a quick tour of the basics:

1. What are I Bonds?

Officially known as Series I Savings Bonds, I Bonds are bonds offered through the U.S. Treasury Department and are backed by the full faith and credit of the U.S. government, and the redemption value cannot decline. Series I bonds are non-marketable bonds that are part of the U.S. Treasury savings bond program designed to offer low-risk investments. Their non-marketable feature means they cannot be bought or sold in the secondary markets.  

2. That sounds great.  Is there a catch? It depends.

The safety of the bonds usually is accompanied by lower returns.  With rising inflation rates, they have an appeal – particularly when other securities are feeling the pressure from inflation.  

3. What is the interest rate on I Bonds?

The interest rate combines two separate rates:

  • A fixed rate of return, which remains the same throughout the life of the I bond.  This rate is currently at 0%. 
  • A variable semiannual inflation rate based on changes in the Consumer Price Index for all Urban Consumers (CPI-U).  This rate is announced in November and March, and runs for 6 months.  Currently, the rate through October 2022 is at 9.62%.    

4. How can I buy them?

You can set up your own account and purchase up to $10,000 of paperless Series I bonds on treasurydirect.gov. You may also purchase up to $5,000 of these bonds with your federal tax refund using Form 8888

5. Are there restrictions on redemption?

The bonds are intended for longer term, inflation-protected, investing, as they are issued as 20-year bonds, with the opportunity to extend to 30-years.  As you will see below, they are not intended for someone with a short-term need for liquidity: 

I Bond Holding Period
Redemption Rules

Up to 1 Year

Cannot redeem

1 to 5 Years

Forfeit last 3 months of interest

More than 5 Years

Full redemption at current value

The one exception to the one year rule is if there is a federally declared disaster.

6. How are Series I Bonds taxed? 

Interest income for Series I bonds is taxable at the federal level, but not at the state and local levels. The series I bond is a zero-coupon bond, meaning that no interest is paid during the life of the bond. The interest is, instead, added back to the value of the bond and earns interest on interest. The bondholder has the option of selecting one of two methods of taxation—the cash method or the accrual method. Under the cash method, tax is only applied when the bonds are redeemed. Using the accrual method, on the other hand, taxes on the imputed interest earned every year. 

7. Can I purchase I Bonds as a gift?

Yes, you can purchase an electronic I bond as a gift for someone and hold it in the "Gift Box" in your TreasuryDirect account until you are ready to transfer it.  Click on the I Bonds as gifts link to learn more.

8. Are I Bonds a good investment?

It depends on what will make you sleep better at night.  They offer a hedge against inflation, which has value for many investors.  I Bonds offer a guaranteed favorable rate of return, which in today’s environment, is a benefit.  Think of I Bonds as insurance: they are nice to have when inflation is high. For individuals with significant wealth, one of the biggest problems with I Bonds is the $10,000 limit on the total amount of such bonds that can be purchased during the year.  Still, they are a “good habit” to have for an overall diversified portfolio. 

Disclosure: This material is presented solely for information purposes and has been gathered from sources believed to be reliable, however, Pacific Asset Management cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. The preceding information is not intended to be tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Advisory services are only offered to clients or prospective clients where Pacific Asset Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Pacific Asset Management unless a client service agreement is in place.
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