How To Buy I Bonds to Protect Your Investment Portfolio

Savings bonds are a popular asset to invest in, especially if you’re nearing retirement. That’s because they’re relatively stable and earn interest, so you can use them to generate income when you’re no longer working.

But not all bonds are the same. They can differ based on who issues them, when they’re issued, and the bond’s objective. 

I bonds are one type of bond that offers more stability than some others. Here’s everything to know about how to buy I bonds and whether they’re a good investment for your portfolio.

Erika Taught Me

  • I bonds are a type of bond issued by the Treasury Department designed to protect your purchasing power against inflation.
  • I bond rates change every November and May.
  • You can purchase I bonds directly from TreasuryDirect.gov or by using your tax refund.

. . .

How Do I Bonds Work?

Bonds are like an IOU. 

They are usually issued by governments (at the federal, state, and local levels), but can also be issued by corporations. 

In exchange for lending your money to a bond issuer, they agree to pay you interest at regular intervals. Once a bond matures, you receive your principal back and can either spend it as you please or reinvest it into a new bond.

This makes a bond a predictable asset to invest in. 

An I bond is a specific type of government bond that protects your money from losing purchasing power due to inflation

Every May and November, the Treasury Department sets interest rates for I bonds, using a combination of a fixed base rate and a rate adjusted for inflation. The current interest rate for I bonds was set at 4.28% in May 2024 and is good to October 31, 2024.

Interest on I bonds accrues monthly and is compounded semiannually. However, you won’t earn your interest until you cash out your I bond.

At a minimum, you’ll need to hold an I bond for 12 months before cashing it out but you can hold it for up to 30 years if you want. 

Taxes on I bonds

Income generated by I bonds is taxed at the federal level (but not at the state or local levels). 

You’ll have to report your I bond earnings as income when you file your taxes. But there are some exceptions. For example, if you use your I bond to cover higher education expenses it may be exempt from taxes.

One thing to note with I bonds is that there is a penalty if you cash it out before the five-year mark. If you decide to do so, you’ll forfeit three months of interest your bond could earn. 

For example, if you cash out your bond after holding it for two years, you’ll only receive 21 months’ worth of interest on the bond. 

How To Buy I Bonds

I bonds are sold through the Treasury Department and can be purchased at TreasuryDirect.gov.

To buy an I bond, you’ll need to set up an account with TreasuryDirect and connect a bank account.

Once your account is set up, you can purchase an I bond digitally. The minimum investment requirement is $25 and the maximum is $10,000.

You can also purchase paper I bonds. These are offered in denominations of $50, $100, $200, $500, or $1,000. The maximum purchase amount for paper I bonds is $5,000. 

You used to be able to purchase a paper I bond through your local bank but now you can only do so using your tax refund. Instead of having the IRS send your refund to your bank account, you can have them send you an I bond.

Unfortunately, you can’t buy I bonds through a brokerage account. They can only be purchased through TreasuryDirect. This can make it challenging to see all the assets in your portfolio in one place. 

Using a budgeting tool to aggregate all of your investments can make it easier to manage your portfolio if it’s spread among different providers.

READ MORE: How to Manage Your Own Investment Portfolio

How To Make Money From I Bonds

I bonds can be a great way to not only protect your portfolio from inflation but also to earn money through interest. 

Interest is earned monthly, however, the interest rate changes every six months. Rates aren’t guaranteed, which means they can go up or down. 

Let’s say you purchase a $5,000 I bond at the current rate of 4.28%. In six months, your bond would earn you $107 in income. That amount could change in the future if the interest rate decreases.

Unlike other income-generating investments, like dividend stocks, interest earned from an I bond is only paid out when you cash in your bond. 

If you’re incorporating I bonds into an income investing strategy, this can affect your cash flow and your ability to use your I bond interest to reinvest into other assets.

READ MORE: ​​Your Full Guide to Investment Asset Classes

Are I Bonds a Good Investment?

I bonds can be a good investment, especially in an economic downturn. The interest rate the Treasury Department sets for I bonds takes inflation into account. That way, the income you earn can help shield you from the loss of purchasing power that results from inflation.

I bonds are also a relatively safe asset to invest in. They are backed by the U.S. government, which means you’re guaranteed to get your money back. If you purchase a $100 I bond, for example, you’ll get $100 back when you decide to cash out your I bond.

That being said, safety isn’t always the best move, especially if you’re young and have a long time for your investment to grow. 

I bonds are less volatile than other assets, like growth stocks, but there is an opportunity cost for keeping your money in a safer asset. You’ll miss out on the ability to capture growth in the market.

While there are benefits to including I bonds in your portfolio, make sure they align with your personal financial goals, risk tolerance, and the time horizon you plan to invest for.

READ MORE: Where to Start Investing: Effective Money Growth for Beginners

FAQs

When is the best time to buy I bonds?

One of the best times to buy I bonds is when inflation is high. Inflation is part of the calculation to determine an I bond’s interest rate. This leads to a higher return on your investment.

It can also be good to buy I bonds as you move closer to retirement. While your asset allocation may skew toward equities when you’re younger, you’ll want to start moving it into assets that preserve capital as you get older. 

I bonds can be held for up to 30 years which can make it a good, stable asset to include in your portfolio when you enter retirement. 

Where can I buy I bonds?

You can buy I bonds directly from the Treasury Department by going to their website, TreasuryDirect.gov. You can fund your account through a connected bank account or you can purchase paper I bonds with your tax refund. 

Complete Part 2 of IRS Form 8888 and send it in with your tax return to tell the government the value of the I bonds you’d like to purchase.

What is the difference between I bonds and EE bonds?

I bonds and EE bonds are two types of savings bonds issued by the Treasury Department but they are distinct in how they earn interest.

EE bonds come with a fixed rate that guarantees to double the value of the bond after 20 years. This is different from I bonds, where the interest rate changes every six months. 

While you can hold an I bond for up to 30 years, you can cash it out after just 12 months. You won’t want to do this with an EE bond as you’ll miss out on the opportunity to let it increase in value.

TL;DR

Bonds are one of the most stable types of investments, especially I bonds, which are backed by the U.S. government. Plus, the interest rate they pay is adjusted to accommodate inflation.

The catch is that you don’t collect any interest until you cash out — and if you cash out before holding it for five years, you’ll pay a penalty.

For guidance on choosing the best investments for your financial goals, check out these helpful episodes of the Erika Taught Me podcast:

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.