How to Invest in U.S. Series I Savings Bonds

Series I U.S. savings bonds are an option for anyone who is interested in owning government bonds.

Many investors consider them to be a viable savings product with low-risk and protection from inflation.

What Are U.S. Series I Savings Bonds?

U.S. Series I savings bonds (I-bonds) are super low-risk, liquid bonds issued by the U.S. Department of the Treasury.

It is a savings product that earns interest and also protects against inflation.

The annual interest rate is determined by a combination of two things: the fixed rate and semiannual inflation rate.

The fixed rate remains the same for the life of the bond while the semiannual inflation rate is a variable rate that changes according to inflation based on the Consumer Price Index for Urban Consumers.

Both rates change on the first day of every May and November.

Many people consider these savings bonds to be loans to the government because they are technically IOUs from the government.

Few believe the government will skip out on a loan, thus why government bonds are viewed as extremely safe investments — like savings accounts.

Determining the Composite Earnings Rate

Fixed rates and semiannual inflation rates are used to calculate the composite earnings rate.

After purchasing an I bond, the fixed rate doesn’t change, but the semiannual inflation rate will change which means the composite will change semiannually.

Here’s how composite rates are determined:

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

Here’s an example of how the Treasury Department calculates the composite I Bond earnings rate:

Fixed rate = 0.00%
Semiannual inflation rate = 0.37%

Composite rate = 0.0000 + (2 x 0.0037) + (0.0000 + 0.0037)
Composite rate = 0.0000 + 0.0074 + 0.0000
Composite rate = 0.0074 = 0.74%

How to Purchase I Bonds

You can purchase Series I Bonds at face value – you’ll get a $50 I Bond for $50. In a single calendar year, you can buy a maximum of $5,000 in bonds.

For paper savings bonds, you’ll receive your purchase in the fewest possible denominations of $50, $75, $100, $200, $500, $1,000, or $5,000.

Electronic bonds can be bought to penny for $25 or more (e.g. $46.77 or $88.02).

I Bonds can be bought by visiting TreasuryDirect (the only accounts that hold electronic I Bonds), ordering paper savings bonds through TreasuryDirect, ordering through a financial institution, or setting up a payroll savings plan.

Recently, the IRS also allows taxpayers to purchase Series I Bonds with your tax refund.

The Best Time to Buy and Sell Bonds

The interest earnings on Series I savings bonds are applied, regardless of the day during the month that you choose to buy or sell them.

Such a technicality means that bondholders can buy late in the month and sell early in the month while still earning the entire month’s worth of interest.

Firstly, it offers greater liquidity to bondholders because their money is tied up for a shorter period of time.

You are committing money late into the month and gaining access to that money early into the month, with no negative effect on your interest earnings.

It may come in handy if the money is needed for a major purchase, a financial emergency or a more profitable investment venture.

Secondly, it boosts your effective return on Series I bonds.

The prudent bondholder who bought I bonds on the last day of a month and sold them early in the month is invested for nearly two months less.

How to Estimate Upcoming Series I Savings Bond Rates

Due to the way that the semi-annual inflation rate is calculated, it is possible to estimate the inflation-rate component of a Series I savings bond by tracking the CPI-U numbers released by the Bureau of Labor Statistics.

  • The semi-annual inflation rate for May 1 to Oct. 31 is calculated by subtracting the CPI-U for March from the CPI-U for September, and dividing it by the CPI-U from September.
  • The semi-annual inflation rate for Nov. 1 to April 30 is calculated by subtracting the CPI-U for September from the CPI-U for March, and dividing it by the CPI-U from March.

The CPI-U for March is announced mid-April and the CPI-U for September is announced mid-October.

What good is that information?

Since the composite rate for I bonds will change on the first day of May and November, you have roughly half a month to purchase I bonds to lock in the current composite rate while also having a good idea of the upcoming composite rate.

Here’s an example:

  • The May 1 to Oct. 31 composite rate was 2.20%.
  • Knowing the released September CPI-U in mid-October, you determine that the inflation component for November is 0.88%. Assuming that the fixed rate is 0%, you’d get a composite rate of at least 1.75%.

Buying I bonds during this 2-week window, means you earn the 2.20% composite rate for six months and a composite rate of at least 1.75% in the subsequent six months.

Redeeming these I bonds after 12 months, and deducting the last 3 months of interest, you’ll earn an effective rate of 1.55% APY (possibly higher if the fixed-rate component is above 0%).

You can compare that rate to the top 1-year CD rate that is currently available and invest in the option that would yield the most interest earnings.

Tax Season Opening

The Treasury also allows taxpayers to buy up to $5,000 per year, per Social Security Number, in paper Series I savings bonds.

This amount excludes the $10,000-per-year limit that applies to electronic I bonds purchases through TreasuryDirect.gov.

One drawback is that you can only use all or part of your tax refund to buy the paper I bonds — a small tax refund means a smaller purchase in I bonds.

And, because you’ll be buying I bonds during tax season, you’re limited to a purchase window that only includes the composite rate offered from November to April.

But, purchasing bonds through tax refunds means you can invest more in I bonds (up to $15,000 total per year) if you find that they are offering attractive returns.

After receiving the paper bonds, you can convert them to electronic bonds that will be recorded into your TreasuryDirect account.

Redeeming Series I Savings Bonds

I bonds are designed as long-term investments — they earn interest for up to 30 years from issuance.

Savings bonds cannot be redeemed within the first 12 months after the purchase unless you were affected by a major disaster.

Any savings bond redeemed within the first five years will incur a penalty of 3 months’ interest. There is no penalty after 5 years.

U.S. Series I Bonds are issued in paper form, so you will be receiving physical paper bonds in the mail.

Saving bonds can be redeemed by presenting the bond and identification at most financial institutions (it is easier at bank or credit union with which you already have an account).

Although interest earned on savings bonds are subject to federal income tax, interest does not have to be reported until redemption or maturity, but you can claim annual interest for tax purposes. Savings bond interest is exempt from state and local income tax.

Simon Zhen

Simon Zhen is a research analyst for MyBankTracker. He is an expert on consumer banking products, bank innovations, and financial technology.

Simon has contributed and/or been quoted in major publications and outlets including Consumer Reports, American Banker, Yahoo Finance, U.S. News – World Report, The Huffington Post, Business Insider, Lifehacker, and AOL.com.

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