# How do I bonds work, and are they a good idea?

> I bonds pay a fixed rate plus inflation, lock your money for a year, and cap purchases at $10,000 a year.

Source: https://www.walletprep.com/learn/i-bonds/ · Updated 2026-10-04 · Saving

An I bond is a US savings bond whose rate has two parts: a fixed rate that never changes and an inflation rate that resets every 6 months. You can buy up to $10,000 a year on TreasuryDirect, but you can't cash it for 12 months, and cashing it before 5 years costs the last 3 months of interest.

## Key facts
- **Two rates make one.** The composite rate combines a fixed rate, set when you buy and kept for the life of the bond, with an inflation rate that resets every 6 months. The combined rate can't go below zero.
- **Locked for a year.** You can't cash an I bond for the first 12 months. If you cash it before 5 years, you lose the last 3 months of interest. After 5 years, there is no penalty.
- **Earns for 30 years.** An I bond keeps earning interest for 30 years unless you cash it sooner. Interest compounds every 6 months, which means it is added to the bond's value and then earns interest too.
- **Federal tax only, and you can wait.** Interest is subject to federal income tax but not state or local income tax. You can usually wait to report it until you cash the bond or it stops earning, and some people can exclude it for higher education costs.

## How the I bond rate works
Every May 1 and November 1, the Treasury announces two numbers. The fixed rate applies to new bonds bought in the next 6 months and stays with those bonds for 30 years. The inflation rate is based on changes in the Consumer Price Index and applies to all I bonds for their next 6 months.
The two are combined with a formula on TreasuryDirect: fixed rate + (2 × semiannual inflation rate) + (fixed rate × semiannual inflation rate). With an example fixed rate of 1.00% and semiannual inflation of 1.50%, that is 1.00% + 3.00% + 0.015% = 4.015%, shown as about 4.02%.
Your bond's rate changes every 6 months from its issue month, not on May 1 and November 1. A bond bought in January gets its new rate each July 1 and January 1. If inflation turns negative, the inflation part can pull the rate down, but never below zero.

## How to buy I bonds
I bonds are now sold only electronically, through a TreasuryDirect account. Paper I bonds, which some people bought with their tax refund, are no longer offered. You open the account on TreasuryDirect, link a bank account and buy any amount from $25 up, to the penny.
The limit is $10,000 per person per calendar year, counted by Social Security number. A married couple can each buy up to the limit in their own accounts, and a business with its own EIN has a separate limit.

## How to cash I bonds
After 12 months, log in to TreasuryDirect, go to ManageDirect and choose to redeem. You can cash all or part of a bond, as long as you take at least $25 and leave at least $25 in the bond. The money goes to your linked bank account.
If the bond is less than 5 years old, you give up the last 3 months of interest when you cash it. After 5 years, you get the full value, with no penalty.

## Taxes on I bond interest
You owe federal income tax on I bond interest but no state or local income tax. Most people wait and report all of it in the year they cash the bond. TreasuryDirect makes a Form 1099-INT available in your account in January of the following year.
If you use the money for qualified higher education costs, you may be able to exclude some or all of the interest from income. Income limits and other rules apply. IRS Form 8815 and Publication 970 explain who qualifies.

## When I bonds make sense
I bonds fit money you won't need for at least a year and want to protect from inflation, like the back half of a 6-month emergency fund once the front half sits in savings. They also suit a medium-term goal that's 1 to 5 years out, if the current rate is competitive.
They fit poorly for anything you might need in the next 12 months, and for money you're investing for decades, where a diversified retirement account has more room to grow. Compare the current I bond rate with savings and T-bill rates before you buy, since the best choice changes as rates move.

## A worked example: cashing an I bond after 1 year
Ana buys $5,000 of I bonds. Assume the rate stays at an example 4.02% for her first year. Rates really reset every 6 months.

- Bought: $5,000
- Interest in 12 months: $203
- Value before penalty: = $5,203
- Last 3 months of interest: −$52
- Ana gets back: = $5,151

1. Interest compounds every 6 months at half the yearly rate: $5,000 × 1.0201 × 1.0201 = about $5,203 after 12 months.
2. After 9 months her bond was worth about $5,151.50, so the last 3 months earned about $5,203 − $5,151.50 = $52.
3. Cashing at 12 months gives up that $52, leaving $5,151. Had she waited until year 5, there would be no penalty.

## Common mistakes
- **Buying with money you'll need this year.** There is no early exit in the first 12 months, not even for a hardship. Keep at least a few months of bills in insured savings before you buy.
- **Chasing last year's rate.** A high rate for one 6-month period says little about the next. Look at the fixed rate, which you keep for 30 years, and today's composite rate, not past ones.
- **Losing track of the account.** Electronic bonds have no paper to find later. Write down your TreasuryDirect account number and tell a trusted person where your bonds are so they aren't forgotten.

## Questions people ask
### What is the I bond rate right now?
It changes every 6 months. TreasuryDirect posts the current composite rate and fixed rate on its I bond page, with new rates announced every May 1 and November 1. Check there right before you buy.

### Can you lose money on I bonds?
The rate can't go below zero, so the value of your bond won't drop. Cashing in before 5 years costs 3 months of interest, but that comes out of interest earned, not the amount you put in.

### Are I bonds better than a high-yield savings account?
It depends on the current rates and when you need the money. Savings lets you withdraw any day. I bonds lock your money for a year and protect against inflation. Compare both rates, after the state tax break, for money you won't touch for a year.

### Can I buy more than $10,000 of I bonds a year?
Not in your own name with electronic bonds. The limit is $10,000 per Social Security number per calendar year. A spouse can buy their own $10,000 in a separate account, and a business with its own EIN has its own limit.

## Do this today
Look up today's I bond rate on TreasuryDirect and write it next to your savings rate. If you already have at least 3 months of bills in savings, decide how much money you won't need for at least a year.

## Sources
- [TreasuryDirect: I bonds](https://www.treasurydirect.gov/savings-bonds/i-bonds/)
- [TreasuryDirect: I bonds interest rates](https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/)
- [TreasuryDirect: Cashing an EE or I savings bond](https://www.treasurydirect.gov/savings-bonds/cashing-a-bond/)
- [IRS: Topic 403, interest received](https://www.irs.gov/taxtopics/tc403)
- [IRS: About Form 8815, savings bond interest for education](https://www.irs.gov/forms-pubs/about-form-8815)

_General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act._