I Bonds Explained

You might be hearing a lot about I Bonds in the news. So, what are these I (for inflation) Bonds really about? I Bonds are designed to protect the value of your money from inflation and are 100% backed by the U.S. federal government.

I Bonds are inflation-adjusted U.S. savings bonds. The I Bond interest rate is based on a calculation tied to the consumer price index and directly correlated with inflation.

The interest on U.S. Treasury Series I Bonds is currently 7.12% and will rise to about 9.6% beginning in May. You can buy up to $10,000 of I-Bonds per year per social security number. Thus, a married couple could register a bond under each spouse's social security number. You can also buy bonds in the name of a trust or entity. Children under 18 can also have I-Bonds.

I Bonds are guaranteed for their principal value plus accrued interest by the full faith and credit of the U.S. Government.

You can cash in an I Bond at any time after 12 months. However, you lose three months of interest if you cash in an I-Bond within the first five years of holding.

Series I savings bonds are not subject to state or local taxes. When you invest in Series I savings bonds, you won't pay state or local taxes on the interest income you earn.

Series I savings bonds are subject to federal taxes. You will owe the federal government taxes on the interest income you earn during the time you hold I bonds. This is because they are a special type of bond known as a "zero-coupon," meaning that you won't receive regular checks in the mail; instead, the interest you earn is added back to the bond's value, and you'll earn interest on your interest.

You choose between one of two taxation methods: the cash method or the accrual method. The cash method means you will only pay tax on your I bonds when you redeem them (i.e., sell them back to the government). If you hold your bonds for 20 years, you won't pay any tax during that period, but you'll owe a tax when you sell out of the investment. If you opt for the accrual method of taxation on your I bonds, you will pay the tax due on the interest you earned for the year that was added back to your principal.

Use I Bonds for qualified educational expenses, and you won't pay any tax on the interest income you earn as long as you meet the income limits. Qualified educational expenses include tuition and fees, such as required lab courses, to a university or college. They also include expenses paid for any course required as a part of your degree program or certificate-granting program. The expenses must be incurred on behalf of you, your spouse, or a dependent for whom you claim an exemption on your taxes. You are required to use both the principal and the interest income from your Series I savings bonds to pay qualified expenses.

You can purchase I Bonds at Treasury Direct. Here is the link: https://www.treasurydirect.gov/. You cannot purchase I Bonds at Schwab. 

If you would like to learn more about I Bonds, please reach out to us to discuss if they would make sense for you.

References:

https://www.experian.com/blogs/ask-experian/how-to-buy-series-i-bonds/

https://www.thebalance.com/how-to-use-savings-bonds-to-help-pay-for-college-2085509

https://www.forbes.com/sites/leonlabrecque/2022/04/19/i-bonds-tax-efficient-interest-with-minimal-risk/?sh=ba079ae7ae48