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 for the November 2010 through April 2011 period:
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 at https://www.treasurydirect.gov (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.
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.