What Are I Bonds?

Inflation is at its highest rate in decades and has been taking a serious toll on everyone's personal finances and investments. In addition, interest rates on savings accounts and certificates of deposit have been extremely low for the past several years and are now suffering negative rates of returns when adjusted for inflation.

Fortunately, the U.S. government has an attractive investment, known as Series I Savings Bonds (and sometimes IBonds), that can lessen some of the financial pain from rising costs and provide investors with safer and higher returns on their money.

Series I Bonds are long-term investments Intended to earn interest and give investors protection from inflation. I Bonds are issued by the U.S. Treasury and are considered virtually risk-free.

The return on I Bonds is a fixed interest rate plus a variable rate based on the Consumer Price Index (CPI). The interest rate is adjusted every six months in accordance with changes in the semiannual inflation rate as measured by the CPI. While the interest rate on an I Bond is currently at an attractively high level, the interest rate in the future could go down if the inflation rate subsides. Currently, I Bonds are paying a composite rate of​ 9.62 percent​ through October 2022.

The interest earned on I Bonds is not paid out as income, but is instead added each month to the principal amount of the original investment. Interest is compounded semiannually on the principal amount, which includes the interest earned on the previous six months. Interest and principal are paid out when you cash the bond. I Bonds are in the news right now with Forbes covering the topic as well.

I Bonds mature in 20 years with the right to extend the maturity for another 10 years at the choice of the investor.

You can invest in I Bonds if you're saving up to make a down payment on a house or make another major purchase. I Bonds are designed as long-term investments. You have to give up three months interest if you redeem your bonds before five years. For example, if you cash in your bonds after 24 months, you would receive interest for the first 21 months. Of course, at the current rates, this may make sense to give up a small portion of interest because you would be receiving a higher interest rate on your I Bonds than comparable rates on bank savings accounts or CDs.

I Bonds are not suitable for short-term investments if you need access to your funds within a year. Certificates of deposit with maturities of several months or a year are better for short-term investments.

I Bonds are also not good for investment portfolios that need to generate a certain amount of income to be paid out on a monthly or quarterly basis

In these times of decades-high- inflation, Series I Savings Bonds are a risk-free way to earn that protects your financial assets and earn an attractive return.

There are two ways to purchase I Bonds: (1) electronically direct with the U.S. government and (2) paper certificates using your federal income tax refund. You cannot purchase I Bonds through a brokerage account.

Most investors purchase I Bonds directly at the website TreasuryDirect.gov. Everything is handled electronically, including the registration. No physical certificates are issued. You must set up an account with the TreasuryDirect website to purchase the I Bonds.

When buying electronically, you don't have to purchase the bonds in round numbered amounts, like ​$100 or $1,000​ increments. The minimum purchase amount is $25, and they can be purchased in amounts down to the exact penny. For example you can purchase an I Bond for ​$1,233.43​ or ​$437.18​ if you want to.

The other method is to purchase I Bonds using a refund on your tax return. With this approach, you will receive paper certificates for your bonds. Paper bonds come in denominations of ​$50, $100, $200, $500 and $1,000​ and minimum purchase of ​$50.​

Electronic purchases are limited to a maximum of ​$10,000​ per calendar year for each individual. If you are using your tax refund to purchase I Bonds, you have a maximum limit of ​$5,000​ per year. The limits apply separately, which means you could use both maximums and purchase up to ​$15,000​ per calendar year.

The maximum purchase amount applies to separate Social Security numbers. In other words, families could invest more by using each member's individual Social Security number.

Interest from I Bonds is exempt from state and local taxes, and you won't incur any federal income tax until the bonds are cashed in.

Unlike other government and corporate bonds, I Bonds are not sold on the secondary markets. This means that the face value of I Bonds does not change with fluctuations in interest rates and your investment will always be its original amount plus interest earned and never decrease in value. If you want your cash, you must redeem your bonds in total

You can cash in your bonds anytime after 12 months. However, you will incur a penalty of three months of interest for cashing in bonds that are less than five years old.

In addition to not being subject to state and local taxes, you may be able to avoid federal income taxes if you use the I Bond interest income for educational purposes. You can exclude I Bond interest from your gross income if you meet these conditions:

• You claim the exclusion in the same tax year you cash in your bonds.
• The funds are used to pay for qualified higher-education expenses in the same tax year.
• Your filing status cannot be married filing separately.
• Your adjusted gross income must be less than ​$98,200​ for single taxpayers or ​$154,800​ for married filing jointly.
• You must be 24 years of age or older before the savings bonds were issued.

You can use I Bonds as gifts for any occasion, such as graduations or birthdays, or for no reason at all.

These are the steps to gift handheld electronic savings bond:

• You must have an account for yourself at TreasuryDirect.
• The recipient must also have an account with TreasuryDirect.
• You must have the recipient's full name, their Social Security number and their TreasuryDirect account number.

If you are gifting a bond to a child under the age of 18, they must have a TreasuryDirect Minor account linked with a parent or an adult custodian account.

If you are using your federal income tax refund to purchase paper I Bonds, you can simply ask for the bond to be issued in the name of the recipient.