I-bonds (Series I savings bonds) are U.S. government bonds that pay an interest rate tied to inflation. They became enormously popular in 2022 when inflation spiked and I-bond rates hit 9.62% — far above anything available in savings accounts or money markets. While rates have since moderated, I-bonds remain a useful tool for inflation protection in a conservative portfolio.
How I-Bonds Work
I-bonds pay a composite interest rate made up of two components:
- Fixed rate: Set at purchase and remains constant for the life of the bond. Currently set by the Treasury Department each May and November.
- Inflation rate: Adjusted every six months based on the Consumer Price Index for All Urban Consumers (CPI-U). This component rises and falls with inflation.
The composite rate is calculated so that inflation protection is baked in — when inflation rises, your interest rate rises. When inflation falls, your rate falls too. The composite rate can never go below 0%, so your principal is protected.
I-Bond Purchase Limits
The annual purchase limit is $10,000 per person in electronic I-bonds through TreasuryDirect.gov. You can purchase an additional $5,000 in paper I-bonds using your federal tax refund (via IRS Form 8888). Married couples can each buy $10,000 for a combined $20,000 per year.
You can also buy I-bonds as gifts for others (including children), which count against the recipient’s limit, not yours — though gift purchases sit in a “gift box” until delivered.
How to Buy I-Bonds
- Go to TreasuryDirect.gov (the official U.S. Treasury website — not a third-party site).
- Create an account. You’ll need your Social Security number, bank account information, and email address.
- Navigate to BuyDirect and select “Series I” under savings bonds.
- Enter the purchase amount and schedule the transaction. Purchases settle in one business day.
The TreasuryDirect interface is notoriously clunky and outdated, but it works. Take your time through the account setup process.
I-Bond Rules You Need to Know
- 1-year lockup: You cannot redeem I-bonds within the first 12 months after purchase. Period. Do not invest money you may need before that.
- Early redemption penalty: If you redeem before 5 years, you forfeit the last 3 months of interest. After 5 years, there is no penalty.
- Maximum term: I-bonds earn interest for 30 years. After 30 years, they stop earning interest and should be redeemed.
- Tax treatment: Interest is subject to federal income tax but exempt from state and local taxes. You can defer reporting interest until redemption, or report annually — most people defer.
- Education exclusion: Interest may be tax-free if used for qualified higher education expenses, subject to income limits.
When I-Bonds Make Sense
I-bonds are best suited for money you want to protect from inflation over the medium term — 1 to 5+ years. Good use cases include:
- Emergency fund overflow (beyond what you need readily accessible)
- Money earmarked for a goal 2 to 5 years away
- Conservative portfolio diversification
- Supplementing a high-yield savings account when inflation is high
I-Bonds vs. TIPS
Treasury Inflation-Protected Securities (TIPS) are another inflation-linked government bond. Key differences:
| I-Bonds | TIPS | |
|---|---|---|
| Where to buy | TreasuryDirect only | TreasuryDirect, brokerages, ETFs |
| Annual limit | $10,000 | None |
| Liquidity | Locked 1 year, penalty before 5 | Tradeable (market price fluctuates) |
| Principal protection | Yes (floor of 0%) | Partial (can lose value in market) |
| Tax on inflation adjustments | Deferred to redemption | Taxable each year (phantom income) |
I-bonds are simpler and offer better downside protection for small investors. TIPS work better in tax-advantaged accounts (IRA, 401k) for larger amounts.
Current I-Bond Rate
Rates change every May 1 and November 1. Check TreasuryDirect.gov for the current composite rate. As of recent periods, rates have ranged from 4% to 6% depending on the inflation component.
Bottom Line
I-bonds offer a rare combination of government safety, inflation protection, and reasonable returns. The $10,000 annual limit makes them a supplemental tool rather than a core portfolio strategy, but for emergency fund overflow or medium-term savings goals, they’re hard to beat. Open a TreasuryDirect account and consider buying before November 1 each year to lock in the current rate.