I Savings Bonds

I bonds are bonds issued by the U.S. Treasury Department. They are payable only to the person to whom they are registered. I Bonds have an annual interest rate that reflects the combined effects of a fixed rate and a semiannual inflation rate. They are an accrual-type security which means interest is added to the bond monthly and is paid when you cash the bond. There are no interest payments. It is available in paper and electronic format.

I Bonds earn interest from the first day of their issue month.

How Rates are Calculated

The I Bond earnings rate is a combination of two separate rates: a fixed rate and an inflation rate:

Fixed Rate

• Announced each May and November
• Applies to all bonds issued during the six months period beginning with the announcement date.
• Remains the same for the life of the bond

Inflation Rate

• Announced each May and November
• Based on changes in the Consumer Price Index for all Urban Consumers (CPI-U)
• Is combined with the fixed rate to determine the earning rate of the bond every six months
• Changes every six months during the life of the bond

Composite Earnings Rates

Fixed rates and semiannual inflation rates are combined to determine composite earnings rates. An I Bond's composite earnings rate changes every six months after its issue date. For example, the earnings rate for an I bond issued in March 2009 changes every March and September.

Example

Here's how the composite rate for I bonds issued Nov 2008 - Apr. 2009 was set:

Fixed rate = 0.70%
Semiannual inflation rate = 2.46% (or 0.0246)

Composite rate = Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)
Composite rate = 0.0070 + (2 x 0.0246) + (0.0070 x 0.0246)
Composite rate = 0.0070 + 0.0492 + 0.0001722
Composite rate = 0.0563722
Composite rate = 0.0564
Composite rate = 5.64%

Highlights

• You can redeem them at any time after a twelve-month minimum holding period
• They increase in value monthly and the interest is paid when you redeem the bond
• I Bonds are sold at face value; i.e., you pay $50 for a $50 I Bond
• I Bonds grow in value with inflation-indexed earnings for up to 30 years
• Interest is compounded semiannually
• No secondary market. Must be redeemed through the government.

Advantages

• Interest not taxed until redemption (if you choose cash accounting method)
• Interest rate paid is indexed to inflation
• Interest rate cannot fall below zero
• I-bonds  them through a bank, online, or through most financial institutions
• Interest exempt from state and local taxes
• Interest exempt from federal taxes if used for college education. See IRS publication 970 "Tax benefits for education"
• I-bonds can be given as a gift (paper or online)
• Minimum purchase is small: $25
• You always get your principle and fixed interest rate back

Disadvantages

• $10,000 maximum purchase per year ($5,000 paper, $5,000 online)
• You must hold them a year before you can cash them in
• If you redeem them before 5 years, you lose 3 months of interest

Tax Implications

• Interest earnings are exempt from State and local income taxes.
• Subject to State and local estate, inheritance, gift, and other excise taxes.
• Interest earnings are subject to Federal income tax.
• Interest earnings may be excluded from Federal income tax when used to finance education (see education tax exclusions). If you qualify, you can exclude all or part of the interest on I-Bonds from your income as long as the money is used are for eligible college educational institutions. Details are available in IRS Publication 550, "Investment Income and Expenses."

Methods of Reporting Interest

You have the choice of reporting interest earned on savings bonds in several ways. Whenever you report savings bonds interest, it should be included with other interest income on your federal income tax return.

Cash Basis Reporting

Federal tax is deferred until the year of final maturity, redemption, or other taxable disposition, whichever is earlier.

If you choose to defer interest reporting, you may want to refer to IRS Publication 550 for full instructions and information.

Accrual Basis Reporting

You report interest annually each year as it accrues. Once you start, you must continue to report interest earned annually for all savings bonds and notes you own and any you may acquire. This may be advantageous for I Bonds in a child's name.

If you choose to report interest annually, you may want to get a copy of Public Debt Form 3501. This table compares the value of your bonds from one year to the next and will help you determine how much interest you should report.

Risks

• If inflation is low, the interest paid is generally lower than a corresponding bond.

Costs

No recurring costs. No purchase cost if bought from TreasuryDirect. Other sources may charge a commission.

Due Diligence

Information you need to collect before purchasing an I-Bond.

• How you will hold them: online or paper
• Fixed rate
• Variable rate (changes every 6 months)
• 1 year from purchase - minimum holding time of the bond
• 5 years from purchase - minimum withdraw period without penalty
• 30 years from purchase - maximum time for interest on the bond
• Method of tax reporting (cash or accrual)
• Is bond to be used to fund education?
• Amount of purchase

Where to Purchase

• Purchase through the TreasuryDirect website
• Your local bank or financial institution
• Internet banking website
• Payroll deduction (if your employer offers it)

Buying from TreasuryDirect Online

• Sold at face value; you pay $50 for a $50 bond.
• Purchased in amounts of $25 or more, to the penny. For example, you can buy a bond for $43.15.
• $5,000 maximum purchase in one calendar year per social security number.
• Issued electronically to your designated account.
• The bond's value can be checked online.

Buying Paper I Bonds

• Sold at face value; i.e., you pay $50 for a $50 bond.
• Purchased in denominations of $50, $75, $100, $200, $500, $1,000, and $5,000.
• $5,000 maximum purchase in one calendar year.
• Issued as paper bond certificates.
• You can convert paper bonds to electronic ones.

You can buy $10,000 worth of I bonds per calendar year: $5000 electronic and $5000 paper.

Redemption Information

• Minimum term of ownership: 1 year.
• Interest-earning period: 30 years.
• Principal plus accumulated interest is paid.
• Early redemption penalties:
  • Before 5 years, forfeit 3 most recent months' interest.
  • After 5 years, no penalty.

FAQs

Can I give an I Bond as a gift?

Online Bonds as gifts

You can purchase an online 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 to the recipient. If you purchase an electronic I Bond as a gift, you must provide the recipient's Social Security Number. The gift recipient must already have a TreasuryDirect account in order for you to be able to transfer the bond to that person. However, if the recipient has not opened a TreasuryDirect account, you may hold the I Bond that you purchased as a gift until it reaches maturity.

Paper Bonds as gifts

I Bonds are great gifts for all occasions. An I Bond can be sent to you so you can present it personally or it can be sent directly to the person receiving the gift. When you buy the I Bond, ask for a free gift certificate. The word "gift" won't appear on the I Bond.

If you're buying an I Bond for a gift and you don't have the Social Security Number of the person you're buying the bond for, simply use your number. Even though your number will be printed on the bond, you'll incur no tax liability, and it won't count towards your annual purchase limit. The Social Security Number is used for tracking purposes only, such as in cases where the savings bond is lost, stolen, or destroyed.

Can I buy an I Bond for an IRA account?

Not through TreasuryDirect. They cannot (will not) set up an IRA account.

Can I ever lose money in I Bonds?

No. They are U.S. Treasury securities backed by the U.S. Government. I Bonds even protect you from the effects of severe deflation—the earnings rate can't go below zero and the redemption value of your I Bonds can't decline.

When are earnings added to the I Bond?

I Bonds increase in value on the first day of each month, and interest is compounded semiannually based on each I Bond's issue date. An I Bond's issue date is the month and year in which an I Bond issuing agent receives the full issue price.

Where can I Bonds be redeemed?

If you own electronic I Bonds, you can redeem them in the TreasuryDirect application. Most financial institutions serve as paying agents for paper I Bonds and Series EE Bonds. If they redeem Series EE Bonds, they also redeem I Bonds.

When can I redeem an I Bond if I need the money?

You can cash your Series I bonds any time after 12 months. You receive the original purchase price plus interest earnings minus any penalties, if applicable. If you redeem an I Bond within the first 5 years, you'll lose your last 3 months interest. For example, if you redeem an I Bond after 18 months, you'll receive the first 15 months of interest.

Resources

U.S. TreasuryDirect I-Bonds - TreasuryDirect description of I-bonds.

Fixed and Inflation Rates of I-Bonds - Current and past fixed and inflation I-bond rates.

Savings Bonds Calculator - Calculate the composite rate of an I-bond.