Why would anyone want to buy I Bonds? Currently, they’re offering a guaranteed, annualized interest rate of 4.30% for new I Bonds purchased between May and November of 2023.
It’s not nearly as strong as the 9.62% rate I bond owners enjoyed from April 2022 until the end of October 2022, but it’s tough to find a guaranteed rate over 4%, and that’s what you’ll get for your first 6 months if you buy I Bonds in the six months from May to November of 2023.
While you may not be a huge fan of the issuer — that would be the U.S. Treasury, a department of the U.S. government — you cannot find a safer source of fixed income. After all, the Treasury has the power to create money and the U.S. dollar still holds prestige as the world’s reserve currency.
How do you buy these I Bonds? It’s not as simple as buying shares of BND or VBTLX from Vanguard, but it’s not terribly complicated, either.
I bought Series I Savings Bonds online from Treasury Direct, and I’ll walk you through the steps. I purchased $10,000 in November of 2021, as did my wife. We repeated those purchases in January of 2022 for a total of $40,000 in I Bonds in a couple of months.
Why You’ve Heard So Much About I Bonds
These bonds are not new, but they’re newly enticing. You see, the interest rate is tied to one of the U.S. Governments measure of inflation, the CPI-U, which was rather high throughout 2022 but coming down in 2023.
For the same reason that Social Security benefits received an 8.7% boost as a cost-of-living adjustment for 2023, I Bonds have been paying a higher rate than they have in years.
For the formula and further details on how the interest rate is calculated, see the explanation at Treasury Direct.
In summary, it’s a combination of a fixed rate (recently increased from 0.4% to 0.9%) and a variable rate, each of which is updated every six months in November and May. The fixed rate has been under 1% since May of 2008 and has not been above 2% since 2001.
The variable rate, since I Bonds were first issued in 1998, has been as low as an annualized -5.56% during the Great Recession and as high as the 9.62% we saw for six months in 2022.
Note that the interest for every I Bond ever issued is updated every six months. Every I Bond purchased in the first two and a half years these were offered enjoys a higher fixed rate than those issued more recently, so those currently pay a higher composite rate.
Understand that the interest rate for all I bonds will change again in November of 2023 and every six months thereafter based on the inflation rate of the previous six months. This rate is calculated for the six months that include March and September, with the numbers released in April and October.
For a detailed look at the interest rates and how they’ve changed for I bonds issued at any time since 1998, please see this chart from Treasury Direct. Plan on zooming in on the table to actually read it; it’s a big one.
Another useful resource for looking at past performance of I Bonds purchased in the past can be found here at eyebonds.info.
Advantages of I Bonds
Interest in I Bonds is credited twice a year, but you do not pay taxes on that interest until you decide to cash out your bond. It is automatically reinvested.
This is effectively a form of tax deferral, which is different than most bonds and bond funds.
Additionally, when you do redeem your I Bonds, the interest will not be subject to state or local income taxes. A downside is that bond interest is subject to ordinary income tax rates at the federal level, which is true of most bonds, the exception being lower-interest municipal bonds.
Furthermore, if you have a modest income when your children are in college, you can redeem your I Bonds completely tax-free when you use the proceeds to cover qualified education expenses. The same is true of Series EE Bonds purchased after 1989.
This interest exclusion phases out at a (MAGI) between $91,850 and $106,850 (2023) for single filers and between $137,800 and $167,800 (2023) for those married filing jointly. If you’re married and filing separately, there is no interest exclusion. Funding a 529 account is a qualified education expense, by the way.
The Interest Rate!
“High Yield” savings accounts are paying about anywhere from a few basis points up to about 4% interest in May of 2023. Typical savings accounts pay even less.
Vanguard’s Total Bond Fund yields 1.5% and the value of the underlying fund is subject to change, unlike the value of an I Bond, which can never drop (or rise) in value.
A 4.30% return is still a pretty good for fixed income at the moment, even if the interest on I Bonds was quite a bit higher 18 months ago.
Low Default Risk
Sure, Congress will play games and kick the can down the road, but the odds of our government actually defaulting on debts owed to investors is low.
There was a brief default in 1979, but Treasury bill holders got their interest after a brief delay. If the U.S. government truly defaults and is never able to pay its debts, we’ve got bigger problems than not receiving interest payments on a portion of our bond allocation that year.
Disadvantages of I Bonds
Annual Purchase Limits
You’re limited to $10,000 per person in online purchases, and you can buy an additional $5,000 in paper I Bonds via your federal tax refund if you paid more in than you owed.
If you’re married, your spouse can do the same, you can make purchases in your kids’ names, and trusts can own them, too.
I’m not going to go out of my way by forming a trust or giving the government an interest-free loan by paying more than necessary towards next year’s tax bill, so I’ll settle for $10,000 a year for me and $10,000 a year for my wife. You could do this twice in succession at the end and beginning of a calendar year, as we did at the end of 2021 and beginning of 2022.
Only One Seller
You can’t buy these from your favorite brokerage, and there’s no I Bond mutual fund or ETF. That also means that there are no fees, so in some ways, this is an advantage.
It does mean that you have to create an account at Treasury Direct, so that’s a bit more to keep track of.
Illiquidity for One Year
You cannot redeem I bonds until you’ve owned them for a full year. If you choose to cash them in before a full five years has passed, you’ll forfeit 3 months of interest payments.
This 3-month interest forfeiture is actually assumed and baked in to the balance shown on your I Bonds, and they’ll credit you the missing interest in your account once you hit the 5-year mark.
Compare this to a more typical 6-12 month penalty for early withdrawals from certificates of deposit, and it doesn’t look so bad.
If you think there’s a chance you may want to purchase I Bonds at some point in the future, I recommend opening a Treasury Direct account now.
Some people have been asked to verify their identity, which can be a time-consuming process involving a Medallion Signature Guarantee (MSG), which is similar to getting a signature notarized, and must be done in-person with some who’s qualified to verify your identity.
Unfortunately, finding someone who can provide the “MSG” is not as easy as finding a notary public or Chinese restaurant. You can search for MSG providers here.
We did not have this issue when signing up for a Treasury Direct account, but I know of numerous others who have. It can be time-consuming, so if you wait until the last minute to make an account (the end of April or October) to try to purchase I Bonds at the current rate, you’ll be out of luck if asked to obtain a Medallion Signature Guarantee.
Considerations for Current I Bond Holders
When I Bonds were paying 7.12% for the first six months back in 2021, these were a safe no-brainer investment. My wife and I each bought $20,000 worth.
When the rate jumped to 9.62% in the spring of 2022, we added another $10,000 to each of our balances for a total of $40,000 worth that is now worth about $44,000, a balance that does not credit us with the last three months’ interest.
As inflation cooled in the fall, the new rate offered was 6.89% and now new investors will get 4.30% on their I Bonds purchased in May through October of 2023. The variable rate, currently just under 3.4%, will fluctuate, but the 0.9% fixed rate is locked in for the duration of ownership.
Those of us who got in on I Bonds in the last couple of years are now getting 3.38% to 4.3% on our I Bonds, depending upon when they were purchased and whether or not they have a 0%, 0.4%, or 0.9% fixed rate to supplement the current variable rate of about 3.4%.
Those interest rates are still respectable and comparable to many high-yield money market and savings accounts. As inflation continues to subside and the variable interest rate declines, however, we may find better uses for that $40,000 plus interest that has accumulated.
Remember that you’re locked in for the first 12 months. You can’t sell during that timeframe. Also remember that the tax on the interest is tax-deferred until you sell. It’s a nice feature, although it does mean that all of the earnings will be taxed in the year in which you cash out.
Finally, recall that if you sell within five years of purchasing them, you’ll lose the most recent three months’ interest. That’s just over $100 per $10,000 invested at the current 4.3% rate. When you log in, the balance shown already reflects the forfeiture of the most recent three months’ worth of interest. It gets added back in at the five year mark.
One final consideration for early retirees is the fact that the interest can be tax-free for certain taxpayers if the I Bonds are cashed in and used for eligible higher education expenses. There are a number of criteria that must be met, and the one that will exclude just about any working physician is that your income must be under about $100,000 for singles and $125,000 for married couples filing jointly. See the precise figures for the phaseout ranges above, but it’s less than most working professionals will earn.
How to Buy I Bonds in 2023?
The easiest way to purchase I Bonds in 2023 is directly from the U.S. Treasury Department at TreasuryDirect.gov.
TreasuryDirect.gov allows you to set up Payroll Savings Plan, which allows you to purchase I Bonds through your employer using your payroll. You can set up the frequency and amount that you want to purchase.
You can also purchase I Bonds using your tax return. This option is no longer available in 2023 since the tax filing deadline has passed, but you can use this option to buy I Bonds in 2024. Buying I Bonds using your tax return offers one unique benefit, you will receive a paper I Bond, compared to buying from TreasuryDirect.gov, which only offers electronic I Bonds.
How to Buy I Bonds from Treasury Direct
Note that these screenshots were taken when I most recently purchased I Bonds, but the website may have been updated in the interim, so the images may not look identical to what’s displayed on your screen. The steps, however, should be more or less the same. I plan to update this post in 2023 when purchasing another $20,000 worth of I Bonds for my wife and I.
Step 1: Go to the TreasuryDirect website
Navigate to Individual / My Accounts. Here is the direct link: https://www.treasurydirect.gov/indiv/myaccount/myaccount.htm
Click on “Open an account” in the middle of the page.
Step 2: Choose to “Apply Now”
You’re taken to overview screen explaining the process. They’ve also got links to tutorials, but I’m hoping this one is the only one you’ll need.
You’ll find the blue “Apply Now” button at the bottom of the screen. Click it!
Step 3: Choose an Account Type
If you’re purchasing as an individual, which will be the most common scenario, click the first circle to indicate that you’re purchasing as a person rather than as a business or a trust.
If you’re not purchasing as an individual, click the appropriate circle. The Finance Buff has a tutorial for buying I Bonds in a trust, which is one way to get more than $10,000 or $15,000 per person per year.
Click the “Submit” button at the bottom once you’ve made your selection above.
Step 4: Enter Your Details
TreasuryDirect calls it Step 2, and it’s the most time-consuming step.
This is straightforward as long as you have the necessary information handy, including a Social Security number (or EIN for a business), your state-issued ID, and bank account info.
Step 5: Don’t Perjure Yourself
Make sure you entered the correct Social Security number or EIN, that you’re not subject to backup withholding (you’d know if you are), and that you are not only a person, but a U.S. person as defined by the IRS.
Click the “Submit” button if all of this is true.
Step 6: You’ve Got an Account!
The Treasury Department welcomes you to your brand-spanking-new account, and it’s ready to use instantly. Let’s keep this party going!
Step 7: Select “BuyDirect” & “Series I”
We’re here to buy some I Bonds. Once you’ve clicked on “BuyDirect” in the menu bar at the top, turning it orange, select the circle next to “Series I” under Savings Bonds.
For the curious, they’ve got a breakdown of the similarities and differences between Series I and Series EE Bonds. EE Bonds are not adjusted for inflation and are currently paying 0.10% as of November, 2021.
Click “Submit” at the bottom once you’ve made your selection, and be sure to select Series I unless you want to give up 7.02% in interest.
Step 8: How Much Would You Like?
Remember, you’re limited to $10,000 per calendar year in online I Bond purchases. The simplest method is to invest $10,000 at once, but if that’s too rich for your blood, you can set up scheduled purchases at regular or irregular intervals.
Enter the purchase amount and date(s). Your bank information was entered earlier, and you’ll want to make sure that your account is selected in the dropdown box as the source of funds.
Regarding timing, as long as your money is in before the end of the month, you’ll earn interest for that month. You don’t earn any more interest by investing on the 1st of the month as opposed to the 31st. That said, there can be a delay of several business days, so I timed my purchase for a week before the end of the month.
When redeeming your I Bonds, it’s best to withdraw early in the month. You don’t accrue any additional interest by remaining invested beyond the 1st of the month.
Step 9: Review and Submit
Look everything over to ensure you didn’t goof anything up. If you goofed, select “Edit” at the bottom and get it right. If all looks good, click “Submit.”
Congratulations! You’ve scheduled your first I Bond purchase(s) in a few short minutes.
The next screen should be a confirmation of what you’ve set up.
You’ll also receive an email from firstname.lastname@example.org confirming the activity.
If you’ve got questions, ask them! I’m almost as new to this as you are. You can reach TreasuryDirect at 844.284.2676 if you can’t find the answer to your questions on the website.
How Many I Bonds Can One Person Purchase Each Year?
The U.S. Treasury Department sets a $15,000 annual purchasing limit for individuals on I Bonds. The annual purchasing limit is split between $10,000 in electronic I Bonds and $5,000 in paper I Bonds.
You can purchase electronic I Bonds directly from TreasuryDirect.gov, and you can only purchase paper I Bonds using your Federal Tax Refund.
How Can I Buy More Than $10,000 I Bonds Each Year?
Technically you can’t buy more than $10,000 of electronic bonds for yourself each year. But, you can gift I Bonds to others.
The U.S. Treasury Department allows you to purchase I Bonds for as many recipients and as many times to a single recipient as you like. The only limit on purchasing I Bonds as a gift is that you can only purchase $10,000 per recipient per purchase.
If you have a spouse, they can gift you, and you can gift them an unlimited amount of I Bonds each year. The only caveat is that each gift purchase can’t exceed $10,000.
If you don’t have a spouse, you and another individual can gift each other I Bonds. There is an annual gift exclusion amount for non-spouse recipients. In 2023, the gift exclusion amount was $17,000. This requires you to file IRS Forn 709 if gifts to non-spouse recipients exceed the $17,000 gift exclusion amount.
When to buy I Bonds in 2023?
Rather than trying to predict if it’s better to purchase now or later in 2023, consider dollar cost averaging. Purchase a portion of what you intend to spend on I Bonds now and the rest after the November 2023 interest release. This will allow you to average the rate you receive rather than choosing one or the other.
Are I Bonds still a good investment in 2023?
Yes, I Bonds are still a good investment in 2023. I Bonds are a great way to take advantage of high inflation rates in 2022, 2023, and potentially the coming years. While I Bonds returns have decreased compared to last year, I Bonds still offer respectable returns compared to other investments, especially if you don’t have any or a small amount of I Bonds.
There are two reasons I Bonds is still a good investment in 2023:
- Rising interest rate environment in 2023
- High Inflation Rates in 2022 and 2023
The rising interest rate environment in 2022 and 2023 has resulted in a higher fixed interest rate offered by I Bonds. At 0.90% fixed interest rate in May 2023, this is the highest the fixed interest rate has been since 2007. The fixed interest rate on I Bonds remained at 0% from May 2020 to October 2022.
The second reason I Bonds are still good investments in 2023 is that the composite interest rate on I Bonds has increased over the last two updates due to the high inflation. The current interest rate of 4.30% on I Bonds is a 0.92% increase from the May 2022 interest rate. In addition, many experts believe that the interest rate on I Bonds will continue to increase in November 2023 due to inflation.
What is the Downside of Buying I Bonds in 2023?
The potential downside of buying I Bonds in 2023 is that the composite interest rate may fall over the following years causing you to get lower returns in the future.
Another downside of I Bonds is that they lack flexibility. You can’t until 12 months after purchase. After 12 months, if you withdraw before five years, you forfeit the most recent three months’ worth of the most interest.
Frequently Asked Questions
When are I Bond rates released in 2023?
The U.S. Treasury Department releases I Bonds rates each year on May 1st and November 1st. The rates apply to all I bonds purchased in the following 6 months. You can find the latest I Bond interest rates information by visiting TreasuryDirect.gov.
What is the current I Bond rate in 2023?
The interest rate for I Bond in 2023 is a 4.30% composite rate and a 0.90% fixed rate. These rates were released on May 1, 2023 and apply to all I Bonds issued between May 1, 2023 and October 31, 2023.
Updated rates will be released on November 1, 2023, and apply to all I Bonds issued between November 1, 2023 and April 31, 2024.
I Bonds’ previous composite interest rate between November 2022 and April 2023 was 3.79% and 3.38% between May 2022 and October 2022.
What is the current I Bond fixed rate in 2023?
The I Bond fixed interest rate for I Bonds between May 1, 2023 and October 31, 2023 is 0.90%. The U.S. Treasury Department will release an updated fixed rate on November 1st, 2023.
How long do I get the current I Bonds rate for?
When you purchase an I Bond, the fixed interest rate at the time of your purchase will remain the same for the entire time you own the I Bond. The variable interest rate of an I Bond rate is called the inflation rate; the inflation rate remains constant for six months at a time.
The inflation rate is updated each year on May 1st and November 1st. You can calculate your new rate using the formula below:
Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
Can I buy $10,000 worth of I Bonds every year?
You can buy $10,000 worth of I bonds every calendar year. To purchase $10,000 worth of I Bonds every year, you have two options:
$10,000 of Electronic I Bonds (directly from TreasuryDirect.gov)
$5,000 of Paper I Bonds (using Federal Tax Refund) and $5,000 of Electronic I Bonds (directly from TreasuryDirect.gov)
The U.S. Treasury Department has individual purchasing limits on I Bonds. The purchasing limit for individuals is $15,000; $10,000 on electronic I Bonds and $5,000 on paper I Bonds.
What should I do if I’ve maxed out my I bonds purchase for 2023?
If you have maxed out your I Bonds purchase and want to own more, you must receive the remaining I Bonds as a gift. If you are married, you and your spouse can gift each other an unlimited amount of I Bonds each year, as long as each purchase is no more than $10,000.
If you have maxed out your I Bonds purchase but don’t want to purchase anymore, some similar alternatives include Certificates of Deposit (CDs) or Treasury Bills.