How to Buy I Bonds and Earn 5.27%

November 2023 Update: I Bond rates are now 5.27% for the next 6 months. The fixed rate has increased from 0.90% to 1.30%. You will receive the new fixed rate for the life of your I bond.

I Bonds have suddenly gone from near obscurity to becoming a very popular savings option. U.S. Treasury is now paying 5.27% annual interest between November and April 2024 for those owning these government savings bonds.

Here is what you need to know about purchasing low-risk I Bonds earning 2-3x that of a high-interest online savings account right now.

What is an I Bond?

I Bonds, also known as inflation bonds or more formally as Series I Savings Bonds, are bonds issued by the U.S. government that are indexed to inflation. Since they are backed by the government, they are a very low-risk investment.

During periods of rising inflation, the purchasing power of your cash decreases. Someone who keeps all their money under their mattress or in a savings account at their local bank that pays 0.1% interest will discover their money will buy less as the price of everything gets more expensive.

Purchasing I Bonds can help hedge against the risk of inflation because their rates adjust with inflation. When inflation rises, the bond’s interest rate is adjusted upward. But when inflation falls, the bond’s rate falls too. However, the interest rate will never go below zero and the value of your I Bonds will never decrease.

How Do I Bonds Work

Consider I Bonds as being similar to variable-rate, flexible-term certificates of deposit (CDs) that you need to hold for a minimum of one year with the option to continue holding for up to 30 years. After one year of ownership, you may cash them out at any time. If you redeem the bonds before 5 years, you will forfeit the interest you earned in the last three months.

The variable-rate aspect of owning I Bonds means you will never leave money on the table due to inflation. The interest rates of the bonds change every six months. New rates are announced by the Treasury every May and November on the 1st.

When you purchase the bonds, you will be paid interest for the next six months at the current rates. Then the rates will change to the new rates for the next six months. This will continue until the bonds are sold or reach maturity after 30 years.

Current I Bonds Rates

As of the November 1, 2023 announcement, I Bonds issued between November 2023 and April 2024 will earn 5.27%

The current fixed rate is: 1.30%

The current semiannual inflation rate is: 1.97%

The composite rate is composed of a fixed rate and the semiannual inflation rate. It is calculated using the following formula:

Total Rate = Fixed rate + 2 x Semiannual inflation rate + (Fixed rate x Semiannual inflation rate)

Total Rate = 1.30% + (2 x 1.97%) + (1.30% x 1.97%)

Total Rate = 5.27%

For a table of the past fixed and inflation rates, you can visit this page.

November 2023 Update: Should You Still Buy I Bonds After November 1st

The last day to lock in the 4.30% annualized rate for six months was October 30.

If you were waiting to see whether the new rates would be higher, you are going to be happy. Although the Fed has been steadily increasing interest rates to lower inflation, the new I Bonds rates have gone up again.

The new I Bond rate for the next six months is 5.27%. This is almost 0.97% higher than the previous rate.

Based on March 2023 CPI-U data released on October 12, the May 2023 I Bond interest rate has increased slightly to 3.94% from 3.38% previously.

This is calculated by taking the March 2023 CPI-U value of 301.836 and the September 2023 CPI-U of 307.789:

[(307.789 / 301.836) – 1] x 2 x 100 = 3.94%

However, the U.S. Treasury has sweetened the pot a bit by increasing the fixed rate to 1.30%, up from 0.90%. You will continue to receive this new fixed rate for the life of the I Bond, which is 30 years unless you cash it before then.

When online savings accounts such as CIT’s Savings Connect (4.65%) or Platinum Savings (5.05% with $5k balance) are offering almost comparable rates with no 12-month lock-in commitments, you may be wondering whether it’s worth it to put your money into Treasury I Bonds.

One thing to consider is the 1.30% fixed rate for the life of the bond purchased today. It was only May 2022 when the interest rate for money deposited in CIT’s Savings Connect earned a measly 0.60% before the Fed started their interest rate hikes. The last time the I Bond fixed rate was this high was 16 years ago.

Where to Buy I Bonds

There are only two ways to buy I Bonds:

• Online directly from the government at TreasuryDirect.gov
• With money from your tax refund after filing your tax return

You cannot buy I Bonds on any of the popular brokerage firms such as Fidelity, Vanguard, or Charles Schwab. You also cannot hold I Bonds in other types of accounts such as a HSA, 401k, Roth, or Traditional IRAs either.

How to Buy I Bonds Online

To buy I Bonds electronically, you will go to TreasuryDirect.gov, a website operated by the U.S. Department of the Treasury. The website looks like it hasn’t been redesigned since the 2000’s, but it is legitimate.

Navigate to the My Account link under the Individuals menu, and you will find a link to open an account. The online application process takes approximately 10 minutes. You will receive your TreasuryDirect account number by email. Be sure to note down your account number as you will need it to log in.

For electronic I Bonds, you can purchase up to $10,000 per Social Security Number in each calendar year.

The $10,000 purchase limit may not seem that much if you have a lot of money available, but there are ways to purchase more.

If you have children under 18, you can buy up to $10,000 in each child’s name with a linked minor account.

If you have a trust, you can buy up to $10,000 per calendar year in the name of the trust.

You can also buy up to $10,000 per recipient as a gift as long as you know the recipient’s Social Security Number and TreasuryDirect account number.

Finally, if you own a business that is a sole proprietorship, partnership, LLC, S-Corp, or C-Corp, you can buy up to $10,000 in the name of that business.

After the account has been created, it will take a couple of days for the ACH transfer to go through. Be sure to double-check that you’ve entered your banking details correctly since the site does not make test deposits to verify your bank account.

How to Buy Paper I Bonds

Besides buying I Bonds electronically, you have the option to purchase paper I Bonds using your federal income tax refund in multiples of $50.

You can buy up to $5,000 in paper I Bonds per tax return in addition to the $10,000 in electronic bonds for a total of $15,000 in Series I Savings Bonds during a calendar year. For a couple filing jointly, they are limited to a total of $5,000 in paper I Bonds.

The minimum purchase is $50, and the bonds are available in denominations of $50, $100, $200, $500, and $1,000.

To buy paper I Bonds, you will include IRS Form 8888 with your tax return. Once your return is processed, your paper savings bonds will be mailed to you within three weeks.

Advantages of I Bonds

Tax Benefits

I Bonds are subject to federal income tax, but not state and local income taxes.

For federal taxes, you have the option to defer reporting the interest until you cash in the bond, give up ownership of the bond and it is reissued, or when the bond reaches maturity in 30 years. The ability to defer taxes allows high-income earners to use I Bonds as a tax-efficient savings option during their peak earning years until retirement, when they may be in a much lower tax bracket.

Federal taxes on Series I Bonds can be avoided entirely when the bonds are used to pay for qualified higher education expenses. For information and how to take this exclusion, see IRS Form 8815 and this page for additional details.

Zero Commissions or Trading Costs

Many financial professionals do not push their clients towards I Bonds since they do not earn a commission for selling the bonds.

I Bonds can only be purchased from the U.S. Treasury online with an electronic funds transfer or with a tax refund after filing your return.

Relatively Safe Investment

U.S. savings bonds are among one the safest investment available, as they are backed by the federal government. Your principal will never decrease in value and your money is super safe. Should the U.S. Government fail, we will have bigger things to worry about.

Although these bonds are not as exciting as investing in the stock market or cryptocurrency, they are a source of less volatile income that can be held for almost as long as you desire. With interest rates that track inflation, you can be sure the money you have in I Bonds will hold their value with inflation.

Disadvantages of I Bonds

I Bonds Are Not Entirely Liquid

The requirement that you must hold an I Bond for at least one year after purchase makes it not a good option for you to park your emergency fund should you need the money immediately.

A solution to the one-year requirement is to purchase I Bonds monthly similar to a CD ladder. That way you do not commit all your money immediately into the bond, and you will have funds becoming available to redeem each month after a year. As long as you purchase before the rates reset in May or November, you will continue to get the published yield for the next six months.

Not Necessary Convenient to Purchase

There are only two ways to purchase I Bonds from the Treasury.

Purchasing the bonds through Treasury Direct means yet another online account and login that you have to keep track of. This account isn’t cannot be used for any other purposes but managing your Treasury bonds.

To purchase paper I Bonds, you will have to intentionally overpay your taxes by adjusting your withholding so that you have a big refund at the end of the year. Most people aim to reduce the size of their tax refund since they are tying up their money that could be spent or invested elsewhere, and also giving the government an interest-free loan for the year.

Purchase Limits

The limit of $10,000 for electronic purchases per Social Security Number per calendar year and $5,000 for paper I Bonds puts a cap on the total amount of I Bonds you can buy in a year.

These limits make it difficult for someone with a large amount of money to purchase a lot. For some, it might not even be worth the trouble.

You can extend these amounts by buying under a trust or a business, and for your children.

Good Money Sense Tip: How to Avoid the 3-Month Interest Penalty

While you will forfeit 3 months of interest if you redeem the I Bonds within the first five years, there is a way to reduce the financial hit by timing when you purchase and sell your I Bonds. This could effectively turn the 3-month penalty into only 1 month of lost interest.

The U.S Treasury credits interest for savings bonds on the first day of each month. Someone who purchases their I Bonds at the end of the month will be considered as holding the bond the entire month and will receive interest for the full month. Then when you sell your bonds, you will want to do it at the beginning of the month after interest is credited.

Closing $ense

I will be buying $10,000 worth of I Bonds in November 2021 and plan to also purchase an additional $10,000 in January 2022. While the current rate will only be for six months, it is not every day that you see such high interest rates for such a super-safe investment.

The low purchase limits mean I Bonds won’t make you rich. However, it will protect the value of the money you have as inflation causes the prices of everything to increase.

For your emergency fund, you should keep enough in an easy-to-access high-interest savings account before chasing higher returns in other investments.

What are your thoughts on government I Bonds? Do you own any? Is it worth buying even with the low purchase amounts?