What Are Series I Bonds? Rates, Risks and Taxes

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Series I savings bonds (I bonds) are non-marketable U.S. Treasury savings bonds that pay interest at a combined rate made up of two parts: a fixed rate that stays the same for the life of the bond, and an inflation rate that resets every six months based on the Consumer Price Index. The combined figure, called the composite rate, cannot fall below zero, so the redemption value of an I bond does not go down. You buy I bonds directly from the Treasury, hold them for at least one year, and can keep them earning interest for up to 30 years.

What Are Series I Bonds?

I bonds belong to the Treasury’s savings bond program, which exists to give individual savers a low-risk way to lend money to the federal government. They were first issued in 1998 as an inflation-indexed alternative to the older Series EE bond.

Three features set them apart from most other bonds.

They are non-marketable. An I bond is registered to its owner and cannot be sold to another investor, listed on an exchange or held in a brokerage account. The only way to turn one into cash is to redeem it with the Treasury. Because there is no secondary market, the bond’s value never swings with market interest rates the way a traded Treasury note’s price does.

They accumulate interest rather than paying it. I bonds work like zero-coupon instruments. No interest checks arrive while you hold the bond. Interest is added to the bond’s value, and that larger value earns interest in the following periods. You receive the principal and all accumulated interest when you cash out.

They are issued electronically. I bonds are bought and held through TreasuryDirect, the Treasury’s online platform. Paper I bonds were discontinued on January 1, 2025. Paper bonds bought before then remain valid and keep earning interest.

How Series I Bonds Work

The interest an I bond earns depends on two separately announced rates, which the Treasury combines into a single composite rate. The Treasury announces both on the first business day of May and the first business day of November.

The fixed rate

The fixed rate is set by the Secretary of the Treasury. Whatever fixed rate is in effect when you buy the bond stays with that bond for its entire 30-year life. A bond bought when the fixed rate is 1.20% will always carry 1.20% as its fixed component, even if later bonds are issued with a fixed rate of zero or 2%.

This is the part of the return that exceeds inflation. Two I bonds bought a few years apart will earn the same inflation component in any given period, but the one with the higher fixed rate will always earn more. For a long-term holder, the fixed rate at the time of purchase matters more than the headline composite rate, which is temporary.

The inflation rate

The variable component tracks changes in the non-seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U). The Treasury expresses it as a semiannual rate: the percentage change in CPI-U over a six-month span. The rate announced in May reflects the change from the previous September to March, and the rate announced in November reflects March to September.

Because it is a six-month figure, the semiannual inflation rate is roughly half of what an annualized inflation number would show, so the composite formula doubles it to put it on an annual basis.

The composite rate formula

The Treasury combines the two components with this formula:

Composite rate = fixed rate + (2 × semiannual inflation rate) + (fixed rate × semiannual inflation rate)

The final term is a small cross-product that keeps the fixed rate’s real value intact when it is compounded with inflation. The result is rounded to two decimal places and expressed as an annual rate.

Hypothetical example: suppose the fixed rate is 1.00% and the semiannual inflation rate is 1.50%.

• 0.0100 + (2 × 0.0150) + (0.0100 × 0.0150)
• = 0.0100 + 0.0300 + 0.00015
• = 0.04015, or 4.02% after rounding

The bond would earn interest at an annual rate of 4.02% for its next six-month period.

The zero floor

If inflation is negative (deflation), the doubled inflation term becomes negative and can offset the fixed rate. The composite rate can then fall toward zero, but it can never go below it.

Hypothetical example: a fixed rate of 0.30% and a semiannual inflation rate of −2.30%.

• 0.003 + (2 × −0.023) + (0.003 × −0.023)
• = 0.003 − 0.046 − 0.000069
• = −0.043069, or −4.31%

Because the result is negative, the Treasury sets the composite rate at 0% for that period. The bond earns nothing for those six months, but its value does not shrink. This floor applies to the composite rate as a whole. In a mildly deflationary period, a bond with a high fixed rate can still earn a small positive rate, while a bond with a zero fixed rate would earn nothing.

When your bond’s rate changes

A common misunderstanding is that every I bond switches to the new rate on May 1 or November 1. That is when new rates are announced and applied to newly issued bonds. An existing bond picks up a new inflation component every six months from its own issue date.

For example, a bond issued in February earns its initial composite rate for February through July. Its rate changes in August, using the inflation rate announced the previous May, and changes again every February and August after that. So the rate a bond earns at any moment can lag the latest announcement by up to five months.

Interest is earned monthly and compounded semiannually. The issue date of an I bond is the first day of the month in which you buy it, so a bond bought on the 28th of a month earns interest as if it had been held for the whole month.

Calculating Series I Bond Value: A Worked Example

The composite rate is an annual rate, but it applies in six-month blocks. Each block, the bond’s value grows by half the composite rate, and the new value becomes the base for the next block.

Hypothetical example: you buy $10,000 of I bonds, and the composite rate is 4.00% for the first six months and 3.00% for the next six.

• First six months: $10,000 × (1 + 0.0400 ÷ 2) = $10,000 × 1.0200 = $10,200
• Next six months: $10,200 × (1 + 0.0300 ÷ 2) = $10,200 × 1.0150 = $10,353

After one year, the bond is worth about $10,353, or $353 in interest. If the composite rate had stayed at 4.00% for both halves, the value would have been $10,000 × (1.02)² = $10,404. Semiannual compounding makes the effective annual yield slightly higher than the stated composite rate when the rate is unchanged.

Now apply the early redemption rule. If you cashed this bond in at exactly 12 months, you would lose the last three months of interest. Those three months fall in the 3.00% period, so you would forfeit roughly a quarter year at that rate, around $77 on this balance. The amount you would receive is closer to $10,276. Past five years, the penalty disappears and you receive the full accumulated value.

Because future inflation is unknown, you cannot calculate an I bond’s exact value years ahead. You can only project it under an assumed path for inflation. TreasuryDirect shows the current value of bonds held in an account.

Buying and Redeeming I Bonds

Where and how to buy

I bonds are sold only through TreasuryDirect. Banks and brokerages do not sell them. To buy, you open an account, link a checking or savings account, and choose an amount.

• Minimum purchase: $25
• Increments: electronic bonds can be bought in any amount from $25 up, to the penny
• Annual limit: $10,000 in electronic I bonds per calendar year for each Social Security Number

The limit applies per person, so two spouses can each buy up to $10,000 in their own names. The limit for I bonds is separate from the limit for EE bonds, which means one person can buy up to $10,000 of each in the same year.

The tax refund option no longer exists

For years, taxpayers could direct part of a federal tax refund toward paper I bonds, which was also a way to buy above the electronic limit. That program ended on January 1, 2025, along with paper bond issuance. A refund can still be deposited into a bank account and then used to buy electronic bonds within the normal $10,000 limit.

Redemption rules

• Months 1 to 12: the bond cannot be redeemed at all.
• Year 1 to year 5: you can redeem, but you forfeit the most recent three months of interest.
• After year 5: no penalty.
• Year 30: the bond reaches final maturity and stops earning interest.

You can redeem part of an electronic I bond as long as you cash at least $25 and leave at least $25 in the bond.

Taxes on I Bond Interest

Federal income tax applies; state and local income tax do not. As an obligation of the U.S. government, I bond interest is exempt from state and local income taxes. The exemption matters most for savers in high-tax states, because it raises the after-tax yield compared with a bank account or CD paying the same nominal rate.

Cash method vs. accrual method

Because the bond pays no interest until you redeem it, you choose when to report the interest:

• Cash method (deferral): you report all accumulated interest in the year you redeem the bond, or in the year it reaches final maturity, whichever comes first. A bond held seven years and then cashed produces one tax bill, in year seven.
• Accrual method: you report the interest each year as it is added to the bond’s value, even though you have not received it.

Most holders defer. Reporting annually can make sense when you expect to be in a much higher tax bracket at redemption, or for a bond held in a child’s name when the child’s yearly income is low enough that the interest attracts little or no tax. Switching methods later involves specific IRS rules, so the initial choice is worth making deliberately.

Education exclusion

Interest can be excluded from federal income tax when you redeem I bonds and use the money to pay qualified higher education expenses at an eligible institution in the same calendar year. All IRS conditions must be met, including income limits that phase out the benefit at higher incomes, a requirement that the bond owner was at least 24 years old when the bond was issued, and rules about whose education the expenses cover.

Benefits of I Bonds

Credit safety and no loss of nominal value. I bonds are among the lowest-risk savings vehicles available to individuals. With the zero floor and no market price, the redemption value only rises or holds steady. The early redemption penalty reduces earnings, not principal.

Inflation linkage. Rising CPI-U raises the inflation component, so the return moves with the cost of living rather than staying fixed while prices climb.

Tax treatment. State and local tax exemption, federal tax deferral until redemption and the possible education exclusion make the after-tax return better than a fully taxable account at the same rate.

Low barrier to entry. A $25 minimum and no fees for buying or holding through TreasuryDirect make I bonds accessible to small savers.

Drawbacks of I Bonds

Illiquidity in year one. The 12-month lockup makes I bonds unsuitable as the only home for an emergency fund. Money that might be needed within a year needs to sit somewhere else.

Annual purchase cap. At $10,000 per person per year, building a large position takes years. Larger portfolios usually cannot rely on I bonds as their main inflation hedge.

Modest real return. Over the long run, the return above inflation equals the fixed rate, which has often been low and has spent long stretches at zero. In those periods, an I bond preserves purchasing power before taxes but does not grow it.

Federal tax erodes the inflation protection. The inflation component is taxed as ordinary income. After federal tax, a bond earning only inflation plus a zero fixed rate leaves you slightly behind inflation in real terms.

Less flexibility than marketable securities. You cannot sell an I bond to someone else, hold it in a brokerage account or an IRA, or use it as collateral.

I Bonds vs. Series EE Bonds

The Treasury currently sells two types of savings bonds. They share most of the same rules but behave very differently.

Interest rates and returns

I bonds earn a fixed rate plus inflation. EE bonds issued since May 2005 earn a single fixed rate for the life of the bond, set at purchase. That fixed rate is typically lower than an I bond composite rate, but EE bonds come with a guarantee: if held for 20 years, a bond is worth at least double its purchase price. The Treasury makes a one-time adjustment at the 20-year mark if needed to meet that guarantee.

The doubling guarantee works out to an annual return of about 3.5% over 20 years. That figure only applies if you hold for the full two decades. An EE bond redeemed earlier earns only its stated fixed rate.

Limits and denominations

Both types share the $25 minimum and the $10,000 annual electronic limit per Social Security Number, counted separately for each type.

Maturity and redemption

Both have a 30-year life. For EE bonds, this consists of a 20-year original maturity followed by a 10-year extension. Both carry the one-year lockup and the three-month penalty before five years.

Taxes and use cases

The tax treatment is the same: federal tax, no state or local tax, cash or accrual reporting, and eligibility for the education exclusion under the same conditions.

The choice comes down to what you want protection against. I bonds respond to inflation, which helps most when price increases are high or uncertain. EE bonds offer a predictable outcome for someone confident they will hold for 20 years, regardless of what inflation does in between.

I Bonds vs. TIPS

Treasury Inflation-Protected Securities (TIPS) are the other inflation-linked Treasury product, and they are often confused with I bonds. Both are tied to CPI-U, but the mechanics differ:

• Marketability. TIPS are sold at auction, trade on the secondary market and can be held in brokerage accounts, IRAs and funds such as an ETF. Their price moves with real interest rates, so selling before maturity can produce a loss. I bonds have no market price.
• How inflation is applied. TIPS adjust their principal for inflation and pay a fixed coupon on the adjusted principal every six months. I bonds raise the interest rate and pay nothing until redemption.
• Deflation protection. TIPS repay at least the original principal at maturity, but adjusted principal can fall during the holding period. I bonds cannot lose value in any period.
• Purchase limits. TIPS have far higher limits at auction and none on the secondary market.
• Taxes. Both are exempt from state and local tax. TIPS holders in taxable accounts owe federal tax each year on the coupon and on principal increases not yet received. I bond holders can defer all federal tax until redemption.
• Real yield. A TIPS real yield is set by the market at purchase and works like yield to maturity adjusted for inflation. An I bond’s real return is the fixed rate set by the Treasury.

For small, taxable savings, I bonds are often simpler. For larger amounts, retirement accounts, or investors who need to sell before maturity, TIPS fill the role I bonds cannot.

Historical I Bond Rates

Since I bonds were introduced in 1998, both components have varied widely. The fixed rate was highest in the early years, reaching 3.60% for bonds issued in mid-2000. It then fell over the following decades and stood at zero for many periods in the 2010s and early 2020s, when bonds earned nothing beyond inflation. The inflation component has ranged from negative readings, which pushed some composite rates to the floor, to the surge of 2022, when bonds issued from May through October 2022 received a composite rate of 9.62%.

The 9.62% applied for only six months to each bond, and those bonds carried a fixed rate of 0%. Once inflation eased, their composite rate fell with it, while bonds bought years earlier with higher fixed rates kept earning more.

How I Bonds Are Used

I bonds tend to fill a few specific roles:

• Mid-term savings with inflation protection. Money for a goal two to ten years out, such as a down payment, gains inflation protection without the market risk of stocks or traded bonds.
• The longer-dated layer of an emergency fund. After the first year, I bonds can be redeemed whenever needed, so some savers keep cash for immediate needs and use I bonds for the portion they are less likely to touch.
• Education savings. For families who meet the IRS conditions, the federal tax exclusion adds to the return.
• A conservative portion of a portfolio. I bonds provide steady value that does not move with stock or bond markets.

When judging the return, compare the bond’s real return (its fixed rate) against the real return of alternatives, and its after-tax yield against accounts taxed differently. A simple ROI figure on a redeemed bond shows nominal gain, which can look strong in high-inflation years while barely preserving purchasing power.

The Bottom Line

I bonds suit individual savers who want inflation protection on money they can leave alone for at least a year, especially those in high-tax states or saving for education. The $10,000 annual cap, the early redemption penalty and a fixed rate that is often low limit their role in larger portfolios. Savers judging a purchase should weigh the fixed rate available at purchase, since it sets the bond's long-term real return.