How Is the I Bond Interest Rate Calculated?
The I bond composite rate combines two components: a fixed rate that stays the same for the life of the bond and a variable inflation rate that resets every May and November based on changes in the Consumer Price Index (CPI-U). The formula is: Composite = Fixed rate + (2 x Inflation rate) + (Fixed rate x Inflation rate). When inflation is high, I bond rates can be very attractive.
What Are the Purchase and Redemption Rules?
You can buy up to $10,000 in electronic I bonds per person per year through TreasuryDirect, plus $5,000 in paper I bonds using your federal tax refund. Bonds must be held for at least 12 months. If redeemed before five years, you forfeit the last three months of interest. After five years, there is no penalty. I bonds earn interest for up to 30 years.
When Are I Bonds a Good Choice?
I bonds are ideal when inflation is elevated because the variable rate adjusts to keep pace with rising prices. They work well for emergency fund overflow, education savings (interest may be tax-free for qualified expenses), or as a conservative inflation hedge. They are less useful in low-inflation environments where other instruments like CDs or T-bills may offer better fixed yields.
Frequently asked questions
Can I bonds lose value?
No. The composite rate on an I bond can never go below zero, meaning your principal is always protected. Even during deflation, the fixed rate component prevents the bond from losing value. You are guaranteed to get back at least what you paid.
How are I bonds taxed?
I bond interest is exempt from state and local taxes. Federal tax can be deferred until redemption or maturity. If used for qualified education expenses and you meet income requirements, the interest may be entirely federal tax-free.
What is the difference between I bonds and EE bonds?
I bonds adjust for inflation while EE bonds earn a fixed rate. EE bonds are guaranteed to double in 20 years. I bonds have no doubling guarantee but protect against inflation. Both have the same annual purchase limits and tax benefits.