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  • Series I Savings Bonds are bonds that earn interest that varies with inflation.
  • You can buy up to $10,000 per person worth of I-Bonds electronically every year.
  • I Bond's current composite interest rate of 9.62% is historically high.
  • Interest paid on I Bonds may decline if Federal Reserve's rate hikes cause inflation to decline.

Series I Savings Bonds have become a much more attractive investment alternative this year because of sky-high inflation. I-Bonds are unique in that buyers can’t lose their principal, and because interest earned is tied to the Consumer Price Index, they can help protect buying power when inflation is rampant.

How much can you invest in Series I Savings Bonds?

I-Bonds are sold directly by the government at Treasurydirect.gov. You can buy them electronically or choose to buy paper bonds. However, electronic purchases offer more flexibility.

If you buy paper bonds, you can buy up to $5,000 per person per year, and the minimum investment is $50. However, if you purchase these bonds electronically, you can buy $10,000 per person per year, and the minimum investment is $25. Also, if you buy electronically, you can buy any increment above $25 (ex. $50.25), but with paper bonds, you must buy in fixed increments (ex. $50, $100, $200, $500, etc.).

Therefore, a married couple could invest up to $20,000 annually in Series I Savings Bonds electronically or $10,000 in paper bonds.

One hack, however, is that the electronic and paper limits are independent of each other. Therefore, you could acquire $10,000 electronically, plus $5,000 in paper bonds, for a total of $15,000 per individual per year.

You can also purchase these bonds as gifts for other individuals, such as family members. Those gifts count toward the recipient rather than your limit.

How much do Series I Savings Bonds Yield?

The amount of interest you can earn on I-Bonds varies depending on changes to the Consumer Price Index (CPI).

The yield comprises a fixed interest rate plus a variable interest rate determined bi-annually in May and November. The combination of the two rates is called the “composite rate.”

The fixed portion remains unchanged for the life of the bond. The variable portion is determined by changes to the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including energy and food, over the preceding six months ending March and September. For example, the May determination is based on the CPI-U change between March and the preceding September, and the November decision is based on changes through September from March.

Once the composite rate is determined, it applies for the first six months to any bond purchased before the next rate determination. Therefore, the composite rate announced in May applies to all I-Bonds purchased from May through October, and the November rate applies to purchases between November through April.

The Series I Savings Bond composite rate is currently a juicy 9.62%. If you buy before the end of October 2022, that rate will apply for the first six months. At that point, any interest you earned will be added to your principal, and the prevailing rate (to be announced on November 1) will apply for the following six months. Because interest is added to the bond amount rather than paid directly, you’ll benefit from semi-annual compounding, or the ability to earn interest on the interest you’ve already earned.

How long do you have to hold Series I Bonds?

I-Bonds earn interest for up to 30 years. However, you can cash out after one year with a penalty. Specifically, if you redeem your bonds after one year and you haven’t owned the bonds for at least five years, you’ll forego the preceding three months' interest.

The Smart Play

If you suspect that inflation will persist, picking up Series I Savings Bonds could be an excellent way to diversify your portfolio. You can lock in the currently high composite yield through the first six months on any bonds you buy before the end of October.

However, November’s adjustment to the variable portion of the interest rate won’t likely be as attractive because inflation, while high, has decelerated. Nevertheless, using monthly data reported through August, TipsWatch estimates the composite rate in November could be about 6%. That's still pretty healthy, but the final rate will depend on September’s CPI. 

The Fed is hiking the Fed Funds Rate to slow inflation, so depending on how successful they are, it’s anyone's guess how I-Bond yields may look when they’re redetermined in May 2023 and again next fall. If the Fed succeeds, inflation could decelerate, resulting in a lower rate. However, the interest rate on your I-Bonds can’t go negative, and your principal is protected. So, conceivably, you could plan on holding these bonds for one year, then reconsider if other investments make more sense, recognizing that after one year, you will forego the prior three months of interest if you cash out.

You’ll also want to double-check with your accountant because while I-Bonds interest accrues and it’s exempt from state and local taxes, you will pay Federal Taxes on your interest when you cash out. One potential exemption, however, could be if you use the interest to fund education expenses and your income is below the annual limits set by the IRS. 

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