How, When, and Why to Buy I Bonds

Why would anyone want to buy I Bonds? Does a guaranteed, annualized interest rate of 9.62% for the next six months do anything for you?

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’re not going to find many safer sources of fixed income. After all, the Treasury has the power to create money.

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 recently 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.

This post has been updated in late April now that it’s not possible to get the prior 7.12% rate followed by six months at 9.62%. New I Bond investors will get 9.62% (annualized) for the first six months and a to-be-determined rate in the months and years that follow. More on how that is determined below.

 

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Why You’re Suddenly Hearing 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, and that’s been going nowhere but up in recent months.

For the same reason that Social Security benefits will receive a 5.9% boost as a cost-of-living adjustment for 2022, I Bonds are now paying more than they have in a long time.

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 (currently 0%) and a variable rate, each of which are 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, on the other hand, has been as low as an annualized -5.56% during the Great Recession and has never been as high as it is now (9.62% through November, 2022) since I Bonds were first issued in 1998.

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 is now paying over 10% annualized for the next six months.

 

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Understand that the interest rate for all I bonds will change in May of 2022 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

 

Tax Treatment

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 $85,800 and $100,800 for single filers and between $128,650 and $158,650 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.

 

The Interest Rate!

“High Yield” savings accounts are paying about 0.5% interest in 2021. Money market funds and 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 7.12% or 9.62% return is awfully good for fixed income at the moment. Act before the end of April, and you’ll get 8.54% over the next year.

 

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 exceptionally 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.

 

Buy Now or Wait?

The information in this segment applied up until the end of April of 2022. I will update the numbers in mid-October when the inflation rate (CPI-U) has been determined for the March to September, 2022 timeframe. Rather than deleting the information, I’ll leave it up as an example of how to approach the timing of I bond purchases.

 

If you have yet to make an I Bond purchase in 2022, you have an interesting conundrum.

If you complete your purchase before the end of April, you are guaranteed 7.12% for the first six months, at which point the interest rate will reset to 9.62% for the next 6 months.

In this case, $10,000 becomes $10,356 after six months of 7.12% interest and grows another 4.81% (that’s half of 9.62%) to become $10,854 after a full year for an 8.54% blended annual interest rate.

If you wait to buy until May, you’ll get 9.62% for the first six months and then an unknown interest rate for the following six months. That rate depends upon the rate of inflation, as measured by CPI-U, between March and September of 2022.

If semi-annual inflation rises by 3.6% or more between March and September, you’ll get 7.2% or higher interest on your I Bonds in the subsequent six months, and you’ll come out ahead for waiting as opposed to buying in April. If inflation cools off over the summer, you’ll see a lower interest rate when it resets again in November, and you would have been better off buying I Bonds in April.

Your guess is as good as mine as to which way inflation will go. My November ’21 and January ’22 purchases will be upgraded to the 9.62% rates in April and June, and I’m quite happy with an 8.54% return over 12 months. I like taking the sure thing, but if you’re convinced inflation’s not going to temper by fall, you could hold off a few weeks to make your first I Bond purchase.

I should note that your exact IRR may be a little better or worse, depending on the days of the month in which you buy or sell, so please don’t hold me to that second decimal point.

I recommend opening a Treasury Direct account now if you don’t have one yet. Some people have been asked to verify their identity, which can be a time-consuming process involving a Medallion Signature Guarantee, which is similar to getting a signature notarized, and must be done in-person with some who’s qualified to verify your identity. We did not have this issue, but I know of others who have.

I also recommend waiting until the last week of the month to make your purchase. You’ll get the entire month’s interest as long as your I bond purchase is made by the end of the month. More on that below.

 

How to Buy I Bonds from Treasury Direct

 

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.

 

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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!

 

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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.

 

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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.

 

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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.

 

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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!

 

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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.

 

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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.

 

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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.

 

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The next screen should be a confirmation of what you’ve set up.

 

 

You’ll also receive an email from [email protected] confirming the activity.

 

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Once your investment has gone through, you can add a beneficiary to the account; TreasuryDirect has instructions here in their expansive FAQ.

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.

 



 

75 thoughts on “How, When, and Why to Buy I Bonds”

  1. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  2. When does it show the amount of interest added to your account?
    I checked after a couple of months and it still says the same amount.

    Reply
    • That’s correct — your balance reflects the 3-month penalty that will be applied if you withdraw your money before the 5-year mark. Plus, you can’t access the money anyway in your first year.

      Best,
      -PoF

      Reply
  3. Wow, your tourtortial was great. I was a little scared to go online buying I Bonds due to the reviews it gets, but it worked. Thank you so much.

    Reply
  4. Has anyone actually successfully done the extra 5k “paper” bond via the tax return route? we are due a large return this year and contemplating doing this, as have already maxed out 10k each for spouse and I.

    And not to sound too much like a millennial, but why a paper bond? can it later be converted to digital asset? when/how do you cash it?

    Reply
    • We did it for the first time this year, and it worked well. Submitted our return second week of April and we received one $5K bond this week. We had the remainder of our refund direct deposited into our bank account as usual. The direct deposit to the bank account showed up first, which made me a little worried when the paper I bond hadn’t arrived. I went to the “Where’s my refund?” website and discovered that it can take up to 3 weeks for paper I bonds to arrive by mail. It showed up a few days later.

      Reply
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  6. FWIW, I _did_ provide the Gov’t. with the additional $10,000 in estimated tax payment/loan before filing, hoping to purchase two additional $5,000 I-bonds (one in my wife’s name, one in my name). It didn’t work so well…I believe I filled out everything correctly on the required Form 8888, but someone in the IRS appeared to have mis-handled it, sending us our $10,000 back as a check, claiming we didn’t order in multiples of $50 or ordered the wrong amt. (neither of which was true). After ~30 minutes on the phone earlier this week with the IRS trying to see if there was any way to fix, I was told the check was sent because “the bank” wouldn’t accept the payment (complete non-sequitur, since no bank is/was involved…the Dept. of the Treasury was supposed to send two $5,000 I-bonds). I’ll give up now and cash the check, but a disappointing experience. Perhaps not as painful as dealing with medallion signature guarantees, but a poor IRS/Govt. response nonetheless. Doubly so with the already such low annual purchasing limits for the electronic bonds…

    Reply
    • I’m not terribly surprised, but I am sorry to hear it. I didn’t even try to deal with that, and I’m not excited about holding paper I Bonds, either.

      Sorry for your misfortune and the government’s incompetence.

      Best,
      -PoF

      Reply
    • I believe you only get $5000 per tax return with Form 8888, so MFJ I received $5000 in various random denominations in the mail.

      Reply
  7. I understand you can buy for yourself and your spouse $10,000 in I-bonds each every year.

    But is it possible to gift $10,000 to your kid and the kid to buy $10,000 in I-bonds as well?

    So if you have 2 kids you can invest up to $40,000 in I- bonds in a year?

    Is the above scenario legit? Did anyone look at it?

    Thank you!

    Reply
    • That is correct. Just be careful with the gift tax (estate tax exclusion) if you’re also putting money in their 529 Plan. You’re limited to $16,000 total per person (with the exception of a 5-year superfunding of a 529 with $80,000 per person). If you’re married, between the two of you, you can gift a total of $32,000 per year.

      Best,
      -PoF

      Reply
      • One important note. If splitting gifts with a spouse or 5 year forward funding a 529, it is important to file a form 709 gift tax return.

        You will neither owe tax nor erode your federal estate tax credit, however, the form 709 is necessary to document both split gifts and 5 year forward gifting to 529 accounts.

        Reply
      • In 2022, the limit has grown to $16,000 per donor per recipient per year.
        It was $10,000 per year in the past and was so for a long time.

        Reply
        • Recent history from the IRS:

          “The annual exclusion for gifts is $11,000 (2004-2005), $12,000 (2006-2008), $13,000 (2009-2012) and $14,000 (2013-2017). In 2018, 2019, 2020, and 2021, the annual exclusion is $15,000. In 2022, the annual exclusion is $16,000.”

          I’d caution against using the word “donor,” since it’s not a donation and not treated as such.

          Best,
          -PoF

  8. “I’m not going to go out of my way by … giving the government an interest-free loan by paying more than necessary towards next year’s tax bill” … but if you _did_ want to do that, might I suggest sending in an extra $5k ‘estimated tax’ payment late in the 4th quarter, then filing as early as possible the following calendar year?

    Reply
  9. Big surprise, the government had trouble with my new account and I need to send them paperwork, from a bank official. I use an online bank, so not so easy. A notary is NOT acceptable. Not worth the frustation.

    Reply
  10. Is the interest compounded or just based upon the initial investment? Also, do you know how often the interest is updated on the website? I cant seem to find any accrued interest information on my account.

    Reply
    • From the FAQ:

      How old do I have to be to open a TreasuryDirect account?

      The minimum age required to open a Primary TreasuryDirect account is 18 years. A parent, natural guardian, or person providing chief support may establish accounts for minor children under the age of 18.

      Reply
  11. Logging in is torture. They want you to enter your password using their virtual keyboard. This presumably is meant to be a security precaution. But because they’re the government, this ill-conceived security measure is easily circumvented. I use Firefox, but the technique is essentially the same with any modern browser. Right-click on the password field and choose “Inspect…” (or similar). Go into the DOM inspector — a window adjacent to the main browser window — and delete the ‘readonly=”readonly”‘ markup to remove the readonly attribute from the password field. Now you have a password field in which you can type your password.

    You could also accomplish the same end by running a single line of Javascript in your browser console, but most users will be less uncomfortable with the method described above.

    Please note that you are not messing with a government website or comitting any sort of hacking crime by doing this. You’re only manipulating your browser’s in-memory representation of their login page to make your life a little easier.

    Reply
  12. Well shoot. Just went to buy $20k using mine and my husband’s accounts and they claim they can’t verify my husband’s info to create an account so now we have to mail some form in (and you know how speedy the government is at these things…). I suppose that is what I get for waiting until the last week of December, though. Guess we’ll only get 10k in this year :/

    Reply
    • LC, I bought $10k for myself as an individual, and $10k as myself doing business as my consulting sole proprietor name. I do not think you can buy more than the $10k under your sole proprietor name. But you can do it every calendar year.

      Reply
      • I was hoping that it would be permissible to buy as an individual and as a sole proprietor to max out to $20k (vs $10k) per year. My name and sole proprietor name is the same, though I do have a business EIN to use vs. my SSN.

        Reply
  13. I’ve been mulling over I-bonds this past week to see if I should invest in it.

    On the one hand, it’s 7.12% which is amazing.
    On the other hand, it’s 1-year of illiquidity.
    But on the 3rd hand (I’m a mutant) — there’s not much I can think of that’s as safe as an I-Bond, and $10k isn’t a lot of liquidity to hold for a year (or 5).

    An I-bond yielding a risk-free return 7.12% really makes the Sharpe Ratio of all other investments go down, by a lot. So it’s almost like I should invest in I-bonds not just because the risk-free rate is so high, but it simultaneously makes so many other investments so unattractive.

    Reply
  14. Thank you for this step-by-step instructional! It was nice to have this tutorial as I was setting up the account as I felt confident that I was doing everything well.

    I am in the process of having funds distributed so I don’t think I can set up a beneficiary until that is completed.

    Thanks again!!!!!

    Reply
  15. Thanks for sharing this info. How would one use the I-bonds to pay for qualified education expenses? Specifically to contribute to a 529 account?

    Reply
    • There’s a link in the post above that goes into greater detail.

      As long as your income is below the phaseout range, you simply redeem the bond and deposit that amount into the 529 Plan.

      “When using the 529 plan as the qualified education expense, the savings bonds cannot be directly transferred to the 529 plan account. Instead, the bonds must be redeemed, and the proceeds deposited into the 529 plan account. The proceeds must be deposited within 60 days of cashing the bonds and within the same tax year. If the entire proceeds are not contributed to the plan, then part of the savings bond interest would be taxable.”

      Cheers!
      -PoF

      Reply
      • Aaaah….the rub in your reply (which I must’ve missed before) is “as long as your income is below the phaseout range.” Well, at least if income is high, we can still at least buy $10K worth of these I bonds. And I’ll keep contributing to the 529 account as I’ve been doing. More savings, which is a good thing after all.

        Reply
        • Yes — there is a strong incentive to have a lower income during your kids’ college years. There’s this opportunity to avoid tax on your I Bond interest. More importantly, there’s the American Opportunity Tax Credit with a similar phaseout range that gives you a $2,000 tax credit on the first $2,000 towards college expenses and another $500 credit on the next $2,000 you spend.

          Cheers!
          -PoF

  16. The data provided is most informative. The one thing not discussed is that the 7.12% rate is for the first 6 months only. There is no ‘fixed rate’ at the present for bonds currently being purchased (11/21 – 04/22) so this rate will be computed solely on the CPI index figure when the rate will be adjusted downward in Apr-May 2022 and become about half the first 6 months rate. Still not a bad rate of return in these low interest earning times. Plus being restricted to a single $10,000 for the year is unappealing for the amount of government red tape to acquire and keep for the term of the bond.

    Reply
    • Thank you for highlight this. I’ve updated the post to more explicitly state that the rate is not locked in, but will change every six months.

      I don’t believe we know yet what the next update will look like; I hope that inflation is tempered in the interim, even if that means my I Bonds earn less. I’d rather have more earning power with the other > 99% of my money!

      Best,
      -PoF

      Reply
  17. POF,

    Thanks for the tip and the instructions. Did you go through the same process for your wife? So are there two separate accounts with separate logins? If you can go through those steps it would be helpful 🙂

    Reply
    • Yes, it’s an identical process with a different login. We use the same joint checking account, so that info will be the same.

      Once you’ve got yours lined up, logout and start over from scratch, repeating the process for your spouse.

      Cheers!
      -PoF

      Reply
  18. I’ve seen a lot of talk about these bonds lately, but this is the first step-by-step tutorial. Kudos to you for putting it together! I just purchased some. 🙂

    Reply
  19. This may be a silly question, but can I take out the interest on the I Bonds without having to fully cash the I Bonds out? Is the interest from the I Bonds like a dividend payment from an ETF, meaning you receive the dividend without having to sell the ETF?

    Reply
  20. PoF, so your readers don’t get confused, the interest rate may update every Nov and May but it doesn’t translate into your bonds’ rate updating at the same time. Your bond holdings update every six months based on when you bought them.

    I’ve been buying iBonds for nearly twenty years now. I like their simplicity and the fact that they can’t go zero. But candidly this moment is a flash in the pan. For long stretches the fixed rate has been zero and inflation has been negligible. So your readers shouldn’t get too locked into the current rate. Yes, there is some short term arbitrage available, but this is really an inflation hedge and not good for much more than that.

    Reply
    • I agree this interest rate is a flash in the pan, but in my case, I am looking for a CD level of risk, and with CD rates as low as they are these bonds look like a good alternative. If you just treat these as a variable rate CD free of state and local taxes with interest accumulating tax deferred, and you think inflation will stay elevated, this looks like a good option. You are correct that it is just an inflation hedge, but currently other low risk investments like CDs are not even providing that hedge.

      Reply
  21. What happens after the 6 month guaranteed 7% interest rate?
    Does the interest rate fluctuate? This part is confusing me.
    Is it a guaranteed 7% interest rate for the full 5 years?

    Reply
  22. Thanks for the tutorial, I might have to go buy some with the cash I have been sitting on. I don’t need for about a year and a half and this could be a nice way to get some interest, despite the penalty. I will have to crunch the numbers quickly, but I think it’ll make sense!

    Reply
    • If you cash out in 18 months, you will have earned 15 months of interest, the first 6 months of which will be at 7.12%.

      As long as you truly don’t need the cash until then, and you’ve got a way to access cash in case you’re wrong about that, it seems like an excellent idea to me.

      Cheers!
      -PoF

      Reply
  23. That seems like a lot of work for a good interest rate on $10,000. What happens to the interest rate when the index it is based on decreases? What about TIPS?

    Reply
    • True on the amount of work, but you can buy $10k each right now for you and your wife if married, then another $10k each in Jan. since the limit is $10k per person per calendar year. You can also buy another $5k by overpaying taxes each year. I also have a consulting business operating as a sole proprietor, so I can buy another $10k a year under that business name. So that’s $30k now and $35k in January . Here is another article discussing these options:
      https://thefinancebuff.com/how-to-buy-i-bonds.html

      Reply
  24. Can these be bought within an IRA or solo401K? I heard that fixed income vehicles are best in these kinds of accounts, as opposed to regular taxable accounts.

    Reply

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