August 24, 2025
Series I Bonds: Fight Inflation & Earn Tax-Free Growth
Looking to protect your savings from inflation while potentially earning tax-free growth? Series I Bonds offer a combination of inflation protection, competitive interest rates, and tax advantages, making them an attractive tool for many investors. Let’s unpack the benefits, limitations, and strategies for leveraging this unique investment opportunity, so you can decide if Series I Bonds are right for you.
What we’ll cover:
- What are Series I Bonds?
- Key benefits and features
- Eligibility
- Limitations and Considerations
- Actionable Strategies
What are Series I Bonds?
Series I Bonds are non-marketable, U.S. government savings bonds that earn interest based on both a fixed rate and an inflation rate, adjusting every 6 months. Series I bonds are considered low-risk investments designed to provide protection against inflation.
The total interest on a Series I Bond is known as the ‘composite rate’ or ‘overall rate’ because it combines two separate interest rates:
- Fixed interest rate is announced every six months in May and November. The fixed interest rate at the time the bond is issued does not change and is compounded semi-annually during the life of the bond.
- Inflation rate is determined by changes to inflation in the U.S. economy. The inflation rate is announced every six months in May and November, and individual I bond rates are adjusted to the current inflation rate every six months, starting on the bond issue date.
Bonds issued May 2024 - October 2024 earn an overall rate of 4.28%
Purchase of Series I bonds are subject to annual limits and can be purchased as electronic or paper bonds. They can be redeemed for the original purchase price plus interest at any time after 12 months, up to a maximum holding period of 30 years. I bonds cashed within the first 5 years will not receive their most recent 3 months of interest income.
Key benefits and features
Inflation protection: Your returns will grow with inflation, protecting your purchasing power.
Competitive interest rates: Current rates outperform most traditional savings accounts and CDs.
Tax-free income:
- Interest is exempt from State and Local income tax
- Interest can be exempt from Federal income tax, if earnings are used for qualified education expenses (income limitations apply).
Strategic timing of tax reporting: income recognition can be either
- Deferred until the first year that the I bond is redeemed, reissued, or reaches maturity
- Reported each year as interest is earned
Holding period: minimum 1 year, up to 30 years
Purchase limits: $10,000 electronic, $5,000 paper per year (per taxpayer).
Eligibility
Individuals purchasing I bonds must have a Social Security Number and meet one of three conditions:
- United States citizen, living in the U.S. or abroad
- United States resident
- Civilian employee of the United States, regardless of residence
Corporations, Partnerships, LLCs, and Trusts are also eligible to purchase electronic, and sometimes paper Series I bonds
Limitations and Considerations
Purchase limits: Total investment in a calendar year (per taxpayer) is limited to:
- Electronic bonds: up to $10,000 through a TreasuryDirect account
- Paper bonds: up to $5,000 through your federal income tax refund
Holding period: You must hold your bonds for at least 1 year, and 3 months of interest are forfeited if bonds are redeemed before 5 years.
No guaranteed return: Your Series I bond will never trigger a loss, but rates can fluctuate and may be lower than other investments during periods of deflation.
Eligibility: Not all taxpayers are eligible to purchase Series I Bonds
- Individuals must have a Social Security Number and be a US citizen, resident or civilian employee
- Corporations, Partnerships, LLCs, and Trusts are also eligible to purchase electronic, and sometimes paper Series I bonds
Actionable Strategies
Maximize your annual limit: Invest the full $15,000 if it aligns with your financial goals. You may be able to purchase an additional $10,000 in electronic bonds per business.
Consider timing purchases: Buy near month's end or sell at the beginning of the month for a slight interest advantage.
Plan your redemption: Utilize tax-advantaged benefits for qualified education expenses, or trigger income recognition in years you may be in a lower tax bracket.
Avoid kiddie tax: If you purchased I Bonds for your children, electing to recognize income early could reduce or eliminate your exposure to paying a higher tax rate on your child’s unearned income. Consult with your tax team before making this decision that could have unintended consequences.
Bonds in action: You invest $10,000 in March 2024 (5.27% rate). Over the next six months, your I bond will increase at a rate of 5.27% for a total of $264. On September 1, 2022, your interest will be compounded and your $10,264 will start earning interest at the new composite rate, based on the bond rate chart.
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This information is for educational purposes only and does not constitute financial advice. Consult a qualified professional before making any investment decisions.