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.
Series I bonds (“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.
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 announces new I bond rates. Each rate combines a fixed rate, which is locked in when you buy and never changes, with an inflation rate that adjusts every six months. You can always see the current interest rate on TreasuryDirect.
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 report your I bond interest as income when you file your taxes. You can report it each year or wait until you cash the bond in. There are some exceptions: if you use the money to pay for qualified higher education expenses and you meet the requirements, you may be able to exclude some or all of the interest from your federal income.
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 per person, per calendar year.
Paper I bonds are no longer sold. Banks stopped selling them back in 2011, and the option to buy them with your tax refund ended on January 1, 2025. Today, TreasuryDirect is the only place to buy I bonds.
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 accrues monthly. Your bond’s rate has two parts: a fixed rate that stays the same for the life of the bond, and an inflation rate that resets every six months. Because the inflation part can go up or down, your overall rate isn’t guaranteed.
Let’s say you buy a $5,000 I bond and its rate is 4%. In six months, your bond would earn about $100. That number could change later if the inflation portion of the rate goes down.
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. Just keep in mind you can’t cash out during the first 12 months.
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: How To Start Investing
FAQs
When is the best time to buy I bonds?
One of the best times to buy is when the fixed rate is higher, since that part stays with your bond for life. High inflation can also boost your rate, but only for six months at a time.
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 at TreasuryDirect.gov. You’ll open an account, link your checking or savings account, and choose how much to put in.
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 earn interest differently.
EE bonds earn a fixed rate, and Treasury guarantees the bond will be worth at least double what you paid after 20 years. I bonds work differently: part of the rate is fixed, and part adjusts with inflation every six months.
You can hold either type for up to 30 years and cash it out after 12 months, but with an EE bond, cashing out early means giving up that 20-year doubling guarantee.
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:
- How To Invest for Beginners (Step by Step)
- Investing Advice from the Most Powerful Woman on Wall Street
- The Missing Piece in 99% of Financial Advice
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