If you're in search of a secure investment that offers a better interest rate than traditional savings accounts or CDs while safeguarding you against inflation, Series I bonds might be the perfect solution. With inflation on the rise, these bonds have gained significant attention, and for good reason. When utilized effectively, they can play a vital role in enhancing your savings strategy.
What Is a Series I Bond?
Series I Bonds, or I Bonds, are a type of savings bond issued by the U.S. Treasury that provide investors with a unique blend of safety and inflation protection. These bonds are regarded as some of the lowest-risk investments available, as they are backed by the full faith and credit of the U.S. government.
Most Series I bonds are issued electronically, but you can also obtain paper certificates with a minimum purchase of $50 using your income tax refund, as stated by Treasury Direct. Currently, the interest rate on new Series I savings bonds is 4.28%, which will remain in effect until October 2024. This rate is consistent with the 4.28% rate that applied during the previous six months ending in April 2024.
How to Calculate Series I Bonds?
The actual, or “composite,” interest rate on an I Bond comprises two components:
- A fixed rate, which is set at the time of purchase and remains locked in for 30 years.
- An inflation-based rate that adjusts every six months, beginning six months after the bond’s issue date. The Treasury announces the size of each adjustment around May 1 and November 1 each year.
Calculating the composite rate involves a more complex formula rather than simply adding the fixed and inflation-based rates together:
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
For new I Bonds issued from May 2024 through October 2024, the composite rate is 4.28%. The current fixed rate is 1.30%, and the semiannual inflation rate is 1.48%. Thus, the calculation for the 4.28% composite rate is [0.0130 + (2 x 0.0148) + (0.0130 x 0.0148)].
How do Series I savings bonds work?
Similar to CDs, Series I Bonds require you to keep your money invested for an extended period to maximize your benefits. All Series I Bonds have a 30-year maturity. You cannot redeem them for at least 12 months after purchase, and if you redeem them before five years, you'll incur a penalty of three months’ worth of interest. The interest paid by Series I Bonds consists of two components: a fixed rate and an inflation rate.
The fixed rate remains constant for the bond's entire life. It is set every six months on May 1 and November 1 and applies to all Series I Bonds purchased during those six months. As of now, the fixed rate is 1.30%. The inflation rate fluctuates throughout the bond’s life, resetting every six months on the same dates, based on the Consumer Price Index for All Urban Consumers (CPI-U). This means the rate increases when inflation is high and decreases when inflation is low.
The total interest you earn is known as the composite rate. This rate will change over the life of your Series I savings bond as the inflation rate adjusts, but it will never fall below 0%. The higher inflation rises, the more you’ll earn. Interest earned on Series I Bonds is exempt from state and local taxes, but it is subject to federal income tax, as well as estate, gift, and inheritance taxes.
Series I Bonds vs. Series EE Bonds
When contemplating an investment in U.S. savings bonds, many investors compare Series I Bonds and Series EE Bonds. Both types are backed by the full faith and credit of the U.S. government and provide a safe, low-risk investment option, but there are several key differences between them.
Interest Rates and Returns
One of the most notable differences between I Bonds and EE Bonds is how their interest rates are determined. I Bonds earn a combination of a fixed rate, which remains constant for the bond's entire life, and a variable inflation rate that adjusts twice a year based on changes in the Consumer Price Index (CPI). This means the interest rate on I Bonds can fluctuate over time, offering protection against inflation.
In contrast, EE Bonds issued after May 2005 earn a fixed interest rate that remains unchanged for the life of the bond. This rate is set at the time of purchase and is typically lower than the composite rate offered by I Bonds. However, EE Bonds come with a unique guarantee: if held for 20 years, they will double in value, effectively providing a 3.5% annual return.
Purchase Limits and Denominations
Both I Bonds and EE Bonds have purchase limits, though they vary slightly. Investors can purchase up to $10,000 in electronic I Bonds per year for each Social Security Number, with an additional $5,000 in paper I Bonds if using their tax refund. EE Bonds also have an annual purchase limit of $10,000 in electronic form per Social Security Number, but there is no additional limit for paper EE Bonds.
I Bonds can be bought in any denomination starting at $25, with a maximum of $10,000 per transaction. In contrast, EE Bonds can be purchased in denominations ranging from $25 to $10,000.
Maturity and Redemption
Both I Bonds and EE Bonds have a 30-year maturity period, consisting of an initial 20-year maturity followed by a 10-year extended maturity. However, their redemption rules differ slightly.
Both types of bonds must be held for a minimum of one year before redemption. If redeemed within the first five years, investors forfeit the most recent three months of interest.
Tax Benefits and Use Cases
I Bonds and EE Bonds offer certain tax advantages. The interest earned on these bonds is subject to federal income tax but is exempt from state and local taxes.
I Bonds are often preferred by investors looking for inflation protection, as their variable interest rate helps preserve purchasing power over time. They can be particularly appealing during periods of high inflation.
On the other hand, EE Bonds, with their fixed interest rate and guarantee of doubling in value after 20 years, may attract investors with a longer investment horizon who prioritize predictable returns.
Pros of Series I Bonds
- Inflation Protection: The interest rate adjusts every six months based on inflation, helping preserve purchasing power.
- Low Risk: Backed by the U.S. government, I Bonds are considered a very safe investment.
- Tax Advantages: Interest earned is exempt from state and local taxes, and federal taxes can be deferred until redemption.
- Flexible Purchase Options: Available in electronic and paper formats, with a minimum purchase of $25.
- No Minimum Age Requirement: There is no age limit for purchasing I Bonds, making them accessible for all investors.
- Easy to Purchase: Can be bought directly from the U.S. Treasury through the TreasuryDirect website.
- Compound Interest: Interest is compounded semiannually, which can lead to increased earnings over time.
Bottom line
If you're seeking a secure investment that provides protection against inflation while offering better returns than traditional savings accounts or CDs, Series I Bonds are an excellent choice. Their combination of fixed and inflation-adjusted rates makes them a robust tool for enhancing your savings strategy, particularly in times of rising inflation. With their guaranteed protection and low-risk profile, Series I Bonds can play a crucial role in your financial planning.
However, if you're looking for even higher returns and more flexible investment options, consider Compound Real Estate Bonds. These bonds offer a compelling 8.5% APY, significantly outperforming traditional savings products and providing a steady, fixed income. With features like no fees, anytime withdrawals, and the added benefit of auto-investing and round-ups, Compound Real Estate Bonds can help you achieve your financial goals with confidence and ease.
FAQS
Where Can I Buy Series I Savings Bonds?
U.S. savings bonds, including Series I bonds, can only be purchased online through the U.S. Treasury's TreasuryDirect website. Additionally, you can use your federal tax refund to buy Series I bonds.
How Long Does It Take for a Series I Bond to Mature?
These bonds are issued at face value with a final maturity of 30 years, consisting of an initial 20-year maturity period followed by a 10-year extended maturity period.
Is series I bond a good investment?
Series I bonds can be an excellent option for earning a higher interest rate than savings accounts and CDs over short to medium timeframes, all while maintaining a comparable level of safety. However, over the long term, you may achieve higher returns through a diversified portfolio of stocks and bonds.
