I Bonds: The Inflation-Protected Savings Bond Explained

I Bonds are one of the stranger financial products available to American investors — a savings bond issued by the US Treasury that adjusts its interest rate every 6 months based on inflation. In normal times, they're a moderately interesting savings vehicle that financial nerds discuss among themselves. In 2022, when inflation hit 9.1% and I Bonds briefly paid 9.62%, they became the most searched personal finance topic on the internet.

The 2022 frenzy has settled. I Bond rates are back to more modest levels. But they remain a genuinely useful product for specific purposes — and understanding exactly what they are and aren't prevents both over-enthusiasm and dismissal.

I Bond Interest Rates Work

I Bond rates have two components that combine to create the composite rate you actually earn:

• Fixed rate: Set at purchase and stays constant for the life of the bond. Ranges from 0% to around 2% in recent years. This is the "real" return above inflation.
• Variable rate: Changes every 6 months (May and November) based on the prior 6 months of CPI data. This is what caused the 9.62% rate in 2022 — the variable component tracked the surge in inflation.

The composite rate formula: [fixed rate + (2 × semiannual inflation rate) + (fixed rate × semiannual inflation rate)]. In practice, the composite rate tracks inflation reasonably closely. The goal is to preserve purchasing power, not to generate real returns above inflation — though a positive fixed rate produces some real return.

Key Rules and Limits

• Purchase limit: $10,000 per Social Security number per calendar year in electronic I Bonds through TreasuryDirect.gov. An additional $5,000 can be purchased with a tax refund in paper form. For a couple with a trust, purchase limits can be layered — consult TreasuryDirect's rules.
• Minimum hold period: 1 year — you cannot redeem I Bonds at all within the first 12 months of purchase.
• 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 maturity: I Bonds continue earning interest for 30 years from issue date, then stop.
• Tax treatment: Federal income tax is deferred until redemption — a genuine advantage for bonds held long-term. Interest is exempt from state and local income tax. If used for qualifying educational expenses, the interest may be federal tax-exempt as well (income limits apply).

I Bonds Make Sense — And When They Don't

I Bonds are excellent when:

• You have emergency fund money you won't need for at least 12–18 months earning less in a savings account than the I Bond rate
• You want a portion of your savings to be inflation-protected without market risk
• You're in a high federal tax bracket and the state tax exemption adds meaningful value
• You're saving for education expenses and meet the income requirements for the education exclusion

I Bonds are not ideal when:

• You need the money within 12 months (absolutely cannot access it)
• Current I Bond rates are below HYSA rates (they frequently are — check and compare)
• You want market-rate returns — I Bonds track inflation, not the stock market, and stocks have dramatically outperformed inflation over long periods
• You have high-interest debt — any guaranteed savings rate is beaten by paying down 20% credit card debt

Asked Questions