Q&A on I Bonds

Tipswatch.com, updated Dec. 15, 2021

The way I Bonds work

An I Bond is a security that earns interest based on combining a fixed rate and an inflation rate.

  • The fixed rate will never change. So if you bought an I Bond in 2014 with a fixed rate of 0.2%, it will continue to have a 0.2% fixed rate for the life of the bond. Purchases through April 30, 2022, will have a fixed rate of 0.0%. I Bonds I bought back in 2000 still carry a fixed rate of 3.4% and will continue to do so through 2030.
  • The inflation-adjusted rate (often called the variable rate) changes each six months to reflect the running rate of inflation. That rate is currently set at 7.12% annualized. It will adjust again on May 1, 2022, for all I Bonds, no matter when they were purchased. (However, the effective start date of the new interest rate can vary depending on the month you bought the I Bond, a Treasury oddity.)

Here is a chart from Treasury Direct showing how the timing of the rate change depends on when you purchased the I Bond:

Issue month of your bondNew rates take effect
JanuaryJanuary 1 / July 1
FebruaryFebruary 1 / August 1
MarchMarch 1 / September 1
AprilApril 1 / October 1
MayMay 1 / November 1
JuneJune 1 / December 1
JulyJuly 1 / January 1
AugustAugust 1 / February 1
SeptemberSeptember 1 / March 1
OctoberOctober 1 / April 1
NovemberNovember 1 / May 1
DecemberDecember 1 / June 1

How is the interest rate determined?

To get the actual rate of interest (the composite rate) the Treasury combines the fixed rate and the inflation rate. The combined rate will never be less than 0.0%. However, the combined rate can be lower than the fixed rate. If the inflation rate is negative, it can offset some of the fixed rate.

If the inflation rate is so negative that it would take away more than the fixed rate, the I Bond pays zero interest. But it cannot below zero. This means that I Bonds are protected against deflation. TIPS, on the other hand, will see their principal balance decline in times of deflation, and therefore are less protected.

Here is an example from Treasury Direct on how the interest rate is determined:

The composite rate for I bonds issued May 1, 2014 – October 31, 2014 is 1.94%
Here’s how we set that composite rate:
Fixed rate0.10%
Inflation rate0.92%
Composite rate = [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)][0.0010 + (2 x 0.0092) + (0.0010 x 0.0092)]
Composite rate[0.0010 + 0.0184 + 0.0000092]
Composite rate0.0194092
Composite rate0.0194
Composite rate 1.94%

How do I Bonds earn interest?

An I Bond earns interest monthly from the first day of the month of the issue date. The interest accrues until the bond reaches 30 years or you cash the bond. Interest is compounded semiannually. Every six months from the bond’s issue date, all interest the bond has earned in previous months is added to the bond’s new principal value. Interest is earned on the new principal for the next six months.

However, when you are tracking your total value on TreasuryDirect or with the Savings Bond Calculator, keep in mind that the values displayed for bonds that are less than five years old do not contain the latest three months of interest.

You can redeem the bond after 12 months. However, if you redeem the bond before it is five years old, you lose the last three months of interest.

Why are they a great investment?

  • First, I Bonds are the most conservative and most safe of all investments. Your principal is 99.9999999% safe and it will never decline, ever. If inflation falls to below zero, the inflation-adjusted rate will fall to zero, but not below zero.
  • I Bonds allow you fantastic flexibility. You can redeem them after one year, costing you three months of interest. Or redeem them after five years and pay no penalty, or just hold them for 30 years and cash out.
  • I Bonds protect you against unexpected inflation. If inflation in the next 30 years suddenly soars to 7%, 10%, 15%, your principal will increase by that amount because of the inflation-adjusted interest rate.
  • I Bonds allow you to defer federal income taxes until you redeem them, so you pay zero in taxes until they are sold. This is a big advantage over TIPS, which carry current-year income taxes for both the coupon rate and the inflation adjustment to principal. (Both TIPS and I Bonds are free of state income taxes, an advantage over bank CDs.)
  • I Bonds are simple to track as an investment. Use the web-based Savings Bond Calculator, update your information, and check it a couple times a year. (The Treasury contends that this calculator is for paper I Bonds only, but it works fine for electronic versions.) This is another huge advantage over TIPS held at TreasuryDirect, which is a do-it-yourself proposition, even for downloading yearly tax forms. Want to track current value of your TIPS? Open up Excel and get to work. Treasury Direct is not going to tell you.

Is it difficult to purchase and manage I Bonds at TreasuryDirect?

A lot of readers don’t like TreasuryDirect, which can be a bit clunky. But the process of buying and redeeming I Bonds at TreasuryDirect works well. First you need to open an account, and I wrote a guide to walk you through the basics: Ready to open a TreasuryDirect account? Here are some tips.

When you set up the account, you will be linking a bank or brokerage account to TreasuryDirect. Then to buy I Bonds, you simply log into TreasuryDirect, set the purchase amount and date, and the purchase will be made. You can purchase I Bonds near the end of a month and get credit for a full month of interest. TreasuryDirect makes timing the purchase easy.

How do I use I Bonds for higher education?

If you use interest from a Series I bond to pay for higher education, you may not have to pay federal tax on the interest. However:

  • If you want to use the bond for your education, you must be the owner of the bond.
  • If you want to use the bond for your child’s education, then you or your spouse, or both, must own the bond. Your child may be a beneficiary but not a co-owner.
  • Your modified adjusted gross income has to be less than the cut-off amount set by the Internal Revenue Service. This amount typically changes every year. I believe the current caps are $84,950 for single taxpayers and $134,900 for married filing jointly, but a gradual phaseout of the benefit begins at lower income levels. See IRS Publication 970 “Tax Benefits for Education.”

What are the downsides to investing in I Bonds?

  1. Investments are limited to $10,000 per person per calendar year for electronic I Bonds held at TreasuryDirect. There is also the option to get $5,000 a year in paper I Bonds in lieu of a federal tax refund. Some investors find this amount too small to make a difference in their asset allocation. However, an investor using multi-year purchases can build a substantial stake in I Bonds.
  2. I Bonds cannot be redeemed in the first year of ownership and redemptions before 5 years will incur a penalty of the last three months of interest.
  3. You cannot create a joint account at TreasuryDirect, so a couple would need to set up two accounts, one with I Bonds registered as Spouse 1 with Spouse 2, and the other, Spouse 2 with Spouse 1.
  4. You cannot own I Bonds in a tax-deferred account. Even though I Bonds earn tax-deferred interest, the fact that they cannot be purchased in an IRA can be cumbersome for investors looking to move money in tax-deferred accounts, without tax consequences.

Fixed rate history

The fixed rate set each May and November applies to all bonds the Treasury issues in the six months following the date when it sets the rate. The fixed rate applies for the life of the bond.

Date the fixed rate was setFixed rate for bonds issued in the six months after that date
November 1, 20210.00%
May 1, 20210.00%
November 1, 20200.00%
May 1, 20200.00%
November 1, 20190.20%
May 1, 20190.50%
November 1, 20180.50%
May 1, 20180.30%
November 1, 20170.10%
May 1, 20170.00%
November 1, 20160.00%
May 1, 20160.10%
November 1, 20150.10%
May 1, 20150.00%
November 1, 20140.00%
May 1, 20140.10%
November 1, 20130.20%
May 1, 20130.00%
November 1, 20120.00%
May 1, 20120.00%
November 1, 20110.00%
May 1, 20110.00%
November 1, 20100.00%
May 1, 20100.20%
November 1, 20090.30%
May 1, 20090.10%
November 1, 20080.70%
May 1, 20080.00%
November 1, 20071.20%
May 1, 20071.30%
November 1, 20061.40%
May 1, 20061.40%
November 1, 20051.00%
May 1, 20051.20%
November 1, 20041.00%
May 1, 20041.00%
November 1, 20031.10%
May 1, 20031.10%
November 1, 20021.60%
May 1, 20022.00%
November 1, 20012.00%
May 1, 20013.00%
November 1, 20003.40%
May 1, 20003.60%
November 1, 19993.40%
May 1, 19993.30%
November 1, 19983.30%
September 1, 19983.40%
Source: TreasuryDirect

Inflation rates

The inflation rate set each May and November applies for six months to all I bonds ever issued. The rate you see here is doubled to create what I call the “inflation-adjusted variable rate” and becomes the variable portion of the composite rate for six months.

The inflation rate set each May and November applies for six months to all I bonds ever issued.

Date the inflation rate was setInflation rate for six months
November 1, 20213.56%
May 1, 20211.77%
November 1, 20200.84%
May 1, 20200.53%
November 1, 20191.01%
May 1, 20190.70%
November 1, 20181.16%
May 1, 20181.11%
November 1, 20171.24%
May 1, 20170.98%
November 1, 20161.38%
May 1, 20160.08%
November 1, 20150.77%
May 1, 2015-0.80%
November 1, 20140.74%
May 1, 20140.92%
November 1, 20130.59%
May 1, 20130.59%
November 1, 20120.88%
May 1, 20121.10%
November 1, 20111.53%
May 1, 20112.30%
November 1, 20100.37%
May 1, 20100.77%
November 1, 20091.53%
May 1, 2009-2.78%
November 1, 20082.46%
May 1, 20082.42%
November 1, 20071.53%
May 1, 20071.21%
November 1, 20061.55%
May 1, 20060.50%
November 1, 20052.85%
May 1, 20051.79%
November 1, 20041.33%
May 1, 20041.19%
November 1, 20030.54%
May 1, 20031.77%
November 1, 20021.23%
May 1, 20020.28%
November 1, 20011.19%
May 1, 20011.44%
November 1, 20001.52%
May 1, 20001.91%
November 1, 19991.76%
May 1, 19990.86%
November 1, 19980.86%
September 1, 19980.62%
Source: TreasuryDirect

Composite rates

The table below shows the current composite rate for all I Bonds . Each composite rate applies for six months. (However, the effective start date of the composite rate will vary depending on the month you bought the I Bond.)

Period when you bought
your I bond
Composite rate for six-month earning period starting during November 2021 – April 2022
FromThrough
Nov. 2021Apr. 20227.12%
May 2021Oct. 20217.12%
Nov. 2020Apr. 20217.12%
May 2020Oct. 20207.12%
Nov. 2019Apr. 20207.33%
May 2019Oct. 20197.64%
Nov. 2018Apr. 20197.64%
May 2018Oct. 20187.43%
Nov. 2017Apr. 20187.22%
May 2017Oct. 20177.12%
Nov. 2016Apr. 20177.12%
May 2016Oct. 20167.22%
Nov. 2015Apr. 20167.22%
May 2015Oct. 20157.12%
Nov. 2014Apr. 20157.12%
May 2014Oct. 20147.22%
Nov. 2013Apr. 20147.33%
May 2013Oct. 20137.12%
Nov. 2012Apr. 20137.12%
May 2012Oct. 20127.12%
Nov. 2011Apr. 20127.12%
May 2011Oct. 20117.12%
Nov. 2010Apr. 20117.12%
May 2010Oct. 20107.33%
Nov. 2009Apr. 20107.43%
May 2009Oct. 20097.22%
Nov. 2008Apr. 20097.84%
May 2008Oct. 20087.12%
Nov. 2007Apr. 20088.36%
May 2007Oct. 20078.47%
Nov. 2006Apr. 20078.57%
May 2006Oct. 20068.57%
Nov. 2005Apr. 20068.16%
May 2005Oct. 20058.36%
Nov. 2004Apr. 20058.16%
May 2004Oct. 20048.16%
Nov. 2003Apr. 20048.26%
May 2003Oct. 20038.26%
Nov. 2002Apr. 20038.78%
May 2002Oct. 20029.19%
Nov. 2001Apr. 20029.19%
May 2001Oct. 200110.23%
Nov. 2000Apr. 200110.64%
May 2000Oct. 200010.85%
Nov. 1999Apr. 200010.64%
May 1999Oct. 199910.54%
Nov. 1998Apr. 199910.54%
Sept. 1998Oct. 199810.64%
Source: TreasuryDirect

9 Responses to Q&A on I Bonds

  1. Drake Stone says:

    I’m new to any kind of bonds but I’m kinda kicking myself about not knowing about I Bonds until now! Regarding the formula to calculate the composite rate:

    For a 6-month period, is the adjusted rate used actually 2X the inflation rate?

    Composite rate = [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]

    I’m fairly certain that is the case but I’m astounded that I never knew about this. I’ve had a couple of financial planners since 2002 and not one has ever even mentioned they exist!
    ———
    One other generalized question:
    When the Fed starts getting involved and actually starts raising interest rates in their attempts to “control” inflation, should we expect the fixed rate to increase and the adjusted rate to significantly decrease?

    Timewise, does that happen quickly or is it something that takes years? (just realized that is probably an economics dissertation!)

    • Tipswatch says:

      What I call the “inflation-adjusted variable rate” (a term not used by the Treasury) is 2x the six-month inflation rate. But that is an annualized rate, only in effect for six months. I think your understanding looks correct. In most cases, the composite rate will equal the fixed rate + variable rate, but if the fixed rate is rather high (not true recently) the formula will reflect a slightly higher composite rate, because of the effect of compounding.

      The Fed raises short-term interest rates, which probably will have little effect on the I Bond’s fixed rate. But if you see the 10-year nominal Treasury rising to a level of 2.5% or higher, that should push 10-year real yields above zero, and THAT could at least make a higher fixed rate possible. I don’t expect that to happen before the May reset.

      • Drake Stone says:

        Thanks, David. I of course now see that Joe had almost the same exact question last week regarding the Fed and potential impacts to an I Bonds fixed rate. I appreciate BOTH responses. Lots to learn.

  2. Joe says:

    Hi David,

    I have been reading your posts and you have answered many questions.

    I was wondering what numbers you focus on and when they come out. I’ve seen your excellent charts on the index and percent changes, but where do these numbers come from and how are they interpreted. For example, looking at your “Q&A on I Bonds” page, January’s inflation index hasn’t been posted. When are they expected and where would I find them if not for your website? I understand that we won’t know the numbers for the next 6-month rate, but I would think as it gets closer to March/April, we will have a pretty good idea of what it should be around (ie at least 3.00% by example only).

    I know you have no crystal ball, but I would like to think it is similar to knowing it’s going to be hotter in the summer than it will be in the winter. How much? Who knows, but we know it will be. Same with the fixed rate. I read your article on why buying now will payoff with 0.0% (ie 14 years to br

    • Tipswatch says:

      Good questions, Joe. The non-seasonally adjusted inflation numbers shown on the “Inflation and I Bonds” page come from the monthly inflation report issued by the Bureau of Labor Statistics. The January report will be issued Feb. 9 at 8:30 am EST. You can go to bls.gov that morning and read the entire report (which I always link to in my monthly inflation article).

      No one can accurately predict future inflation, especially more than a month out. The experts have been way off on estimates over the last year. I’ve been guessing that inflation from September 2021 to March 2022 will run in a range of about 2.25% to 3.75%, which would result in a new I Bond variable rate of 4.5% to 7.5%. That’s a guess, but it does look like “headline” inflation will be fairly high through March, because the baseline numbers for January to March 2021 were pretty low. But non-seasonally adjusted inflation might run a little lower. Those numbers were higher than the headline numbers back in January to March 2021 … 0.43% for January (versus 0.3% for headline), 0.55% for February (versus 0.4%), and 0.71% for March (versus 0.6%).

      • Joe says:

        Hi David,

        Thanks for the reply. I see my message cut off for some reason. I mentioned that I saw your article about comparing to wait for an uptick in the fixed rate vs going ahead and taking the 7.12% and how it would take years to catchup/break even.

        On that note, I meant to also ask about the government and raising interest rates. They’re talking about 3-4 rate hikes this year. Does this have anything (effect) on the fixed rate for I Bonds or is that apples and oranges? I know it’s not a total direct relationship, but does it lean towards the fixed rate going up for I Bonds? Thanks again.

        • Tipswatch says:

          Short-term rate hikes probably won’t have any direct effect on the I Bond’s fixed rate, but keep an eye on the 10-year nominal Treasury. As of today it is yielding around 1.88%, if it climbs to about 2.5%, that could bring 10-year real yields to close to zero. The 10-year real yield will need to be maybe 0.25% or higher before we see any increase in the I Bond’s fixed rate. In November? Possibly.

  3. L.I. Coleman says:

    How are the bonds affected in those years when the inflation rate was negative?

    • Tipswatch says:

      The interest rate of an I Bond can never go below zero, so in a time of extended deflation, the interest rate could fall to 0.0% for six months. This happened in the period of May to October 2015, when the variable rate was -1.60%. For six months, that would have been applied against any fixed rate the I Bond carried. But because an I Bond can’t return less than 0.0%, I Bonds actually outperformed inflation by at least 1.60% during that period.

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