What Are I Bonds?

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Current macroeconomic conditions are leaving consumers scratching their heads as they look for appropriate ways to beat inflation. Holding cash doesn’t seem to be a safe option anymore, but there is one solution: I bonds.

I bonds are a long-term savings option for U.S. citizens to earn a return while hedging against inflation. There is an annual purchasing limit of $15,000 per person.

What Are I Bonds?

I bonds, or Savings Bonds: Series I, are securities issued by the U.S. Department of the Treasury. Just like any other savings bond, they’re a long-term method for people to earn interest on their money.

How Do I Bonds Work?

I bonds are interest-earning for up to 30 years, but they can be redeemed early should the owner choose to cash out. Buyers should be aware, however, that I bonds cashed within the first five years forfeit three of their interest-earning months.

What Are the Benefits of I Bonds?

The main benefit of attracting consumers and investors to I bonds is their connection to the inflation rate. A fixed interest rate is combined with the inflation rate — which is set twice per year — to get the total compoundable interest rate. This way, consumers can protect their hard-earned savings from deteriorating in value.

Additional advantages of I bonds are that they are risk-free and can be redeemed as soon as one year after purchase.

How Do I Bond Rates Work?

I bond rates change twice a year — every six months starting from when you purchase the bond. This is to adjust for both higher and lower periods of inflation. Currently, the I bond interest rate is 9.62% until October 2022.

Some see I bonds as an alternative safe-haven asset given the recent volatility in commodities, stocks and crypto markets.

Where Can I Buy I Bonds?

I bonds can only be purchased directly from the U.S. Department of the Treasury. They come in two forms:

• Electronic I bonds
• Paper I bonds

Electronic I bonds can be bought from Treasury Direct. Users are required to set up an account to do so. The other option is to buy paper I bonds using a federal income tax refund. 

Both options are subject to separate minimum and maximum purchases per year. For electronic I bonds, the minimum buy is $25 and the maximum is $10,000. For paper I bonds, the minimum is $50 and the maximum is $5,000. 

These maximum limits can be combined to arrive at a total cap of $15,000 for I bond purchases annually. 

If a purchase order of I bonds exceeds the limits in place, it could take up to 16 weeks for the buyer to be refunded.  

Who Can Buy I Bonds?

To own I bonds, individuals must have a valid Social Security number and be one of the following:

• A U.S. citizen (including those living abroad)
• A U.S. resident
• A civilian employee of the U.S.

I bonds can also be bought on behalf of children under 18 if they also satisfy the above conditions. Corporations and partnerships cannot buy I bonds.

Can You Lose Money on I Bonds?

No. Buying I bonds carries no risk because they are backed by the U.S. government. I bonds can be redeemed at any time after 12 months have passed to collect the interest accrued.

Final Take

In recent months, I bonds have been seen as an alternative safe-haven asset given the recent volatility in commodities, stocks and crypto markets. If a consumer has excess savings that they won’t need access to any time soon, I bonds will give a far better return than savings accounts.

Rates are accurate as of June 24, 2022, and subject to change.

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