What are I Bonds? Everything you need to know to earn nearly 7% interest

The inflation-adjusted U.S. savings bonds will earn 6.89% interest through April 30.

  • By Veronica Dagher,
  • The Wall Street Journal
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I Bonds remain an attractive choice for many investors. These inflation-adjusted U.S. savings bonds will earn a 6.89% annual rate for six months, starting Nov. 1. Previously, I bonds earned a 9.62% annual rate when bought before Oct. 28.

The yield for I Bonds far exceeds cash, and the bonds are appealing for investors who want to grab a higher rate of return without the risk of the stock market. I Bonds have been popular with investors this year as inflation hit four-decade highs and markets plunged. The Treasury sold nearly as many I bonds on Friday—a little under $1 billion dollars—than it sold over the course of three years from 2018 to 2020, a Treasury Department spokesman said.

But understanding how, when and how much of these bonds to buy can get tricky. For example, you don’t want to face any early withdrawal penalties.

To help untangle the rules and strategies for making the most of I Bonds, here are answers to some of the most frequently-asked questions posed by Wall Street Journal readers.

What are I Bonds?

I bonds are inflation-adjusted Series I savings bonds backed by the U.S. government.

The interest rate on I Bonds is recalculated every six months. The I Bond interest rate is based on a calculation tied to the consumer-price index. The overall CPI increased 8.2% in September from the same month a year ago, according to the Bureau of Labor Statistics.

The I Bond rate is a combination of a fixed rate and an inflation adjustment. The Treasury is paying a fixed rate of 0.4%; the fixed rate had been zero since May 2020.

Bonds issued from Nov. 1 to April 30, 2023, will earn 6.89% for six months. I bonds have a 12-month lockup period.

There is a $10,000 annual limit per person for I Bonds, yet there are certain strategies to exceed that ceiling.

Where do I buy I Bonds?

Investors create an account on the TreasuryDirect website to buy electronic bonds. They can also buy paper bonds with their tax refund through an Internal Revenue Service program. If you have extended your tax return and have an overpayment, you can elect to purchase I Bonds with the refund, said Pamela Ladd, senior manager for public accounting for the American Institute of Certified Public Accountants.

I bonds aren’t available in tax-sheltered vehicles such as individual retirement accounts, Roth IRAs or 401(k)s. Nor can brokers or financial advisers purchase them for you.

What are the benefits of I Bonds?

“I bonds are as safe as cash but yield a much higher rate of return,” said Mr. Pepper. As long as you’re comfortable with the 12-month lock up period, I Bonds are a great place to invest excess cash right now, he said.

During the time that the I Bond is held, there are no federal taxes due. Even though you’re getting the benefit of compounding interest every six months, you don’t pay any federal taxes until you actually cash out the bonds.

Additionally, there are no state or local taxes on the interest earned, which is a big benefit for investors in high-tax states, said Mr. Pepper. Contrast this with a traditional bank certificate of deposit where you’ll be subject to both federal and state taxes as the interest is earned, he said.

Is it too late to get the 9.62% annual rate?

Yes. According to the TreasuryDirect website, investors must have completed their purchase and received a confirmation email by Oct. 28 to lock in the 9.62% rate.

I bonds purchased after Oct. 28 will receive the 6.89% rate for six months.

When is I Bond interest paid?

Interest is paid in a lump sum when the bond is cashed.

An I Bond earns interest monthly from the first day of the month in the issue date, so if you purchase a bond on Nov. 20, you would get interest for the entire month of November, said Ms. Ladd, at the American Institute of Certified Public Accountants.

The interest, which is compounded twice a year, accrues for up to 30 years or until you cash the bond, whichever comes first, said Ms. Ladd.

I didn’t use my tax refund to purchase $5,000 in I Bonds when I filed my tax return. Is it too late to buy I Bonds with my refund money?

Yes. Up to $5,000 of your tax refund is eligible to be put into I Bonds a year, under the Internal Revenue Service program. You can still buy up to $10,000 in I Bonds this year if you haven’t already done so. The option to buy up to $5,000 more with your tax refund is a separate program.

But if you already filed your return for the year and didn’t opt to purchase I Bonds with any refund money, it is too late. Form 8888 (used for allocating a refund to an I Bond) isn’t permitted if filing an amended tax return, said Mr. Pepper.

When do I Bonds mature?

You can cash out I Bonds after 12 months but there will be a penalty equal to three months of interest if you cash out in the first five years. I Bonds earn interest for up to 30 years.

You can cash a minimum of $25 at a time, and must leave at least $25 in your TreasuryDirect account when doing partial redemptions.

How do I buy I Bonds for my children?

Children under 18 can own I Bonds, however they can’t open a TreasuryDirect account, said David Stolz, a certified public accountant in Tacoma, Wash.

A parent may open an account for the child and the account will be linked to the adult’s account, which will allow them to buy electronic I Bonds in the name of the child. These I Bonds would be purchased under the child’s name and Social Security number, he said.

The annual I Bond purchase limits are based on the recipient, not the giver. The child could receive up to $10,000 in electronic I bonds and up to $5,000 in paper I Bonds a year.

How do I purchase I Bonds in my trust?

You can add an additional $10,000 to the annual I Bond purchase limit with a properly registered trust, said Mr. Stolz. When you register your account at TreasuryDirect, you have the option to create an entity account, including trusts and partnerships.

Trusts require an account manager that can act alone on behalf of the trust and the wording in the registration must specifically identify the trust, he said.

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