Are I bonds a good investment right now?

What is an I bond?

Bonds are debt instruments, meaning when you buy them, you’re essentially lending your money to the issuer. In exchange, the issuer agrees to repay your initial investment plus interest. Depending on the type of bond you buy, the rate you receive may be impacted by supply and demand, the financial strength of the issuer, and other factors.

Series I savings bonds are one type of savings bond issued by the US Department of the Treasury. These investments are structured in a way that their value cannot decline over time and they’re backed by the federal government, so they’re considered one of the lowest-risk investments available.

The primary purpose of an I bond is to help protect investors against inflation. I bonds have a composite rate, or the total rate investors receive for a set period, that’s tied to a fixed rate and an inflation rate. The US Treasury adjusts I bond rates every six months.

During periods of high inflation, the inflation rate on I bonds tends to be fairly high. For instance, annual inflation increased by 8.6% from May 2021 to May 2022, and I bond inflation rates increased from 1.77% to 4.81% over that same time period.

But during low-inflation periods, I bond inflation rates tend to be low, resulting in lower returns for investors. From May 2019 to May 2020, for instance, the annual inflation rate increased by just 0.1%, and I bond inflation rates declined from 0.70% to 0.53% during that period.

I bonds earn interest each month, and their interest is compounded every six months. As your I bonds continue to earn interest and that interest compounds semiannually, the principal balance of your initial investment grows. The longer your money remains invested, the more you’re likely to earn.

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I bonds are a good investment right now

Although the composite rate for I bonds recently lowered in May, it's still a worthwhile investment. Experts had predicted that the rate would decline when the US Treasury reset bond rates. (In late April 2023, the composite rate for I bonds came in at a generous 6.89%.) Annual inflation rates dipped from 6% in February to 5% in March. But even though rates could drop come May, the rate you’ll receive for the first six months of I bond ownership is determined by when you invest. So, for example, if you buy I bonds before May 1, 2023, you’ll be locked in with a 6.89% rate until October, even if rates subsequently decline.

Even if you wait until May, investing in I bonds might still be worth it, depending on the new composite rate. While it’s impossible to tell exactly how much the I bond composite rate will change, many are suggesting rates will dip below 4%.

Are I bonds a good investment for everyone?

While I bonds may be a good investment, they aren’t the right choice for everyone. That’s because they’re meant to be a long-term investment of up to 30 years. You could opt to cash them as soon as one year, though, but you’d lose out on three months’ interest. If you wait five years, you won’t lose any interest when you cash them in.

Apart from being a fairly long-term investment, US government bond returns also tend to be lower than stock market returns. Of course, bonds are also a lower-risk investment than stocks. But for conservative investors looking to diversify, investing in US government bonds could be a smart choice.

Here’s a general look at how bonds and stocks compare and the type of investor each is best for. Keep in mind that bond rates and stock market performance will vary depending on when you choose to invest, and the risk of loss can be high when investing in individual stocks.

How to buy I bonds

You can buy electronic I bonds online through the US Treasury or paper I bonds with your United States tax return. There’s a $25 minimum to purchase electronically or a $50 minimum to purchase paper I bonds. You can purchase a maximum of $10,000 in electronic I bonds and $5,000 in paper I bonds during a calendar year.

To purchase I bonds electronically, follow these steps:

• Head to the TreasuryDirect website
• Click ‘Create a New Account.’
• Select a type of account (individual or entity.)
• Enter your personal information (name, address, Social Security number, etc.)
• Choose a username and password.
• Answer some security questions.
• Create your account.
• Log in and click BuyDirect and then I bonds.
• Enter the amount you’d like to buy.
• Enter your payment information.
• Enjoy your I bonds!

To purchase paper I bonds, follow these steps:

• Fill out your tax return.
• If you’re receiving a refund, complete IRS form 8888 (Allocation of Refund.)
• File the Allocation of Refund form with your tax return.
• Await receipt of your paper I bonds.
• Enjoy your I bonds!

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When do I bonds mature?

I bonds can continue to earn interest, or mature, for up to 30 years. After that period, they won’t earn interest any longer. So if you bought I bonds in 2023, they’d reach final maturity by 2053, assuming you didn’t choose to cash them in sooner. You can cash in your I bonds after five years of ownership without sacrificing any interest they’ve accrued.

I bonds and taxes

One of the benefits of owning I bonds is that you won’t need to pay local or state taxes on your bond earnings. You will need to pay federal taxes on them, though. But there’s some flexibility in when you pay federal taxes on I bond interest. You can choose to include the interest and pay taxes on it every year you own your I bonds, or you can defer the payment until they reach full maturity.

Paying interest each year can be advantageous, especially if you’ll likely earn a significant amount on your I bonds when they mature. Otherwise, you could end up with a large tax bill down the line.

If you opt to pay each year, you won’t get an annual 1099 from the US Treasury for your bond earnings. Fortunately, figuring out how much interest you earned on I bonds in a given year is pretty simple. If you have a TreasuryDirect account, you can view your account statements to determine your interest earnings.

With paper bonds, the process is a little more complicated, but still not too difficult. Simply use the Paper Savings Bond Calculator provided by the US Treasury to help estimate your interest earnings. Report the amounts on your federal tax return as you would with other interest income, such as interest earned on a savings account.

If you opt to defer interest, you’ll receive either a paper or electronic 1099-INT form from the US Treasury before tax time the year your bonds mature. You’ll then include the amount on that form on your federal tax return.

Those who pay interest on their I bond earnings each year will need to convey that to the IRS once their I bonds mature. For guidance on how to do that, read the instructions on IRS Publication 550.

I bonds vs. other types of bonds

In addition to I bonds, the US Treasury also issues Series EE savings bonds. Here’s what to know about I bonds versus other types of US Treasury bonds.

I bonds vs. EE bonds

While I bonds come with a rate that fluctuates every six months, EE bonds retain the same rate for at least 20 years. Their rate can increase or decrease in the 10 years before they mature, though. (EE bonds reach final maturity after 30 years.) As of May 1, 2023, EE bonds have a 2.50% interest rate.

The US Treasury guarantees that the value of EE bonds will at least double over the first 20 years of bond ownership. They don’t make this same guarantee with I bonds, though I bonds will never decline in value because their interest rate will never be below zero. Like I bonds, if you cash in EE bonds before five years of ownership, you’ll forfeit three months’ worth of interest.

Unlike I bonds, EE bonds are no longer available in paper format, though you may own paper EE bonds if you bought them before 2012. You can purchase EE bonds electronically through a TreasuryDirect account. There’s a minimum purchase of $25 and a maximum purchase of $10,000 in a calendar year.

I bonds vs. savings bonds

Both I bonds and EE bonds are types of savings bonds issued by the US Treasury. Though these savings bonds have some similarities, the way they earn interest works slightly differently. In the past, the US Treasury has also issued different types of savings bonds in addition to these two.

For instance, investors could purchase HH savings bonds from the Treasury up until 2004. These bonds matured in 20 years, as opposed to the 30 years you’d get with an I or EE bond. They were paper-only, and you could buy $500, $1,000, $5,000, or $10,000 worth of HH bonds. HH bonds earned interest semiannually, and interest payments were deposited in bondholders’ bank accounts every six months.

Apart from HH bonds, the US Treasury also has several other older or retired savings bond types, including Series A, B, C, D, E, F, G, H, J, and K. Investors can also purchase US Treasury bills, notes, and Treasury Inflation-Protected Securities (TIPS) through their TreasuryDirect accounts.

It’s also an option to invest in corporate bonds and municipal bonds, though these aren’t offered by the US Treasury. Instead, these bonds are issued by companies and state or local governments, and they can be purchased through a brokerage. There may be fairly high minimums for corporate bonds, though. High-yield bonds are also available, though these tend to come with higher risks. These bonds are often issued by companies with a low credit rating, which may mean their default risk is higher. No matter which bond investment you’re considering, it’s essential to do your research before you buy.