Are I Bonds a Safe Investment?

Inflation has reached a 40-year high. Just about everything, from your summer vacation to your daily coffee, is rising in price. Meanwhile, financial markets are plunging, and your investments are losing value. Where are you supposed to turn to earn a decent return on your money?

The answer may be Series I savings bonds, or I bonds. The U.S. government issues Series I savings bonds that pay you back at two different rates: one fixed rate (currently 0%) plus an additional rate amount that reflects the consumer price index, or CPI, a widely followed measure of inflation. This second component is adjusted every May and November.[1]

Here’s more on investing in I bonds, including their rates, how much you can invest and how to decide if they’re a good option for you.

The short answer is possibly. But particularly in times of high inflation, I bonds can yield impressive returns because part of the rate is based on the rate of inflation.

The latest I bonds issued from May through October yield 9.62%, composed of a 0% fixed rate and an inflation adjustment of 9.62%. The CPI over the 12 months through April increased 8.3%. That means you’re beating inflation, at least for now. And because they are fully backed by the U.S. government, I bonds are among the safest investments you can make.[2]

Tip

Bonds can be issued by companies or governments when they want to raise money. By buying a bond, you’re giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year, according to Vanguard, an investment advisor.

I bonds can be bought only by individuals and their trusts and entities, not investment funds. You can invest up to $10,000 per year, plus $5,000 more if you use your tax refund to purchase them. They are also relatively affordable, with values starting at $25.

No. You’re always guaranteed to get back at least what you paid for it. The redemption value of the bond will never decline, and the interest rate can’t fall below 0%. There may be other sorts of government or corporate bonds that produce higher returns, depending on market conditions, but they may carry higher risk.

Probably not. I bonds are a great, safe investment but they’re paid out at the end of their 30-year maturity. You can cash them in after 12 months, but if you redeem an I bond within five years of purchase, you give up three months of interest.

Also, it’s good to be aware that while individuals can purchase I bonds online directly from the Treasury, there is no secondary trading market for them.

Most people buy these bonds online, but if you get a paper bond, say, as a gift for someone, keep in mind that they can’t just ask their broker to unload the bond in a heartbeat. You can sell paper bonds only by sending them to the Treasury or finding a bank that will accept them, which can take a while.

You actually can’t purchase I bonds in a retirement account like a 401(k) or IRA because they already have tax advantages. Since there are no payouts until the bond matures or is sold, you won’t pay taxes on it until then. When you do cash out, you will owe federal tax but no state or local taxes.

If proceeds are used to pay for higher education, they might be fully tax exempt. You can check here for the requirements for tax exemption.

One rate for the I bond is fixed, at 0%, while the other is variable—it changes every six months, based on the consumer inflation rate set on the first business day of May and November.

Stocks are riskier assets, in part because they aren’t guaranteed like Treasury bonds. That means returns from stocks may be much higher or lower.[3] But in times when there is high inflation, I bonds could provide impressive returns.

I bonds take 30 years to mature. If you’re still holding the I bond 30 years from your purchase date, you can redeem it to collect all the interest you earned over that time as well as the face value, or what you originally paid.

I bonds can be bought and sold online with ease using the TreasuryDirect portal. Log in and use the link for cashing in securities in “ManageDirect.”

For paper bonds, you have two options.[4]

• If you hold an account at a local bank and it cashes savings bonds, ask the bank if it will cash yours. The answer may depend on how long you’ve held an account there. Find out what dollar limit, if any, it has on redemptions and what identification and other documents you may need. Note that some banks may not cash savings bonds at all.

• Send them to Treasury Retail Securities Services, along with FS Form 1522. You don’t need to sign the bonds. You will have to validate your identity. FS Form 1522 explains how to do that and it also includes the address.

You must hold I bonds for at least 12 months before redeeming them, then you can cash in a minimum of $25 or any amount above that in one-cent increments. If you cash only a portion of a bond’s value, you must leave at least $25 in the TreasuryDirect account. When you redeem, you get both your initial principal and interest.

Overall, I bonds are a safe investment to hedge against inflation, especially if you’re feeling a bit gun-shy about investing at all, considering the volatility across many markets right now.