Experts predicted that I bonds could offer a 9.6% annual return come May, based on March Consumer Price Index data that was released April 12, showing inflation has surged 8.5% year over year. While this was an estimated figure at the time, it turns out they were right on the nose. Investors can now buy I bonds at a 9.62% rate through October 2022.
I bonds benefit from the inflation surge as they pay both a fixed rate return, which is set by the U.S. Treasury Department, and an inflation-adjusted variable rate return, the latter of which changes every six months based on the Consumer Price Index. In other words, they can protect your cash against inflation.
Note that individuals can’t buy I bonds through a brokerage account, only through the U.S. Treasury Department’s website, and there is a limit to how much you can invest. You generally can’t buy more than $10,000 in I bonds each year, plus an optional $5,000 extra if you put your tax return in paper bonds.
I bonds mature after 30 years, meaning you can continually earn interest on them for 30 years unless you cash them out first. While you can redeem them as early as one year after your initial purchase, cashing in early, specifically within five years, means you forfeit the last three months of interest earned. For tax benefits, you can defer declaring your interest until maturity or until you cash out.
Cashing in I bonds in fewer than five years means you’ll be missing out on the last three months of interest, yet the return is so high that it’s likely still worth doing compared to other savings vehicles like high-yield savings accounts and CDs.
Yet, it’s important to note that I bonds are generally seen as long-term investments with a reliable return. Your money will be tied up in I bonds for at least one year, so if you’re looking for something more accessible in the near future — as in, within a year — consider a short-term CD
KEY FACTS: I Bonds can be purchased through October 2022 at the current rate. That rate is applied to the 6 months after the purchase is made. For example, if you buy an I bond on July 1, 2022, the 9.62% would be applied through January 1, 2023. Interest is compounded semi-annually.
REMEMBER! You can only purchase up to $10,000 in I bonds each calendar year. If you buy I Bonds exceeding that limit, we will process a refund, which may take up to 16 weeks.
Use I bonds to:
- save in a low-risk product that helps protect your savings from inflation
How do I bonds earn interest?
Interest on an I bond is a combination of two rates:
- A fixed rate of return which remains the same throughout the life of the I bond
and - A variable inflation rate which we calculate twice a year, based on changes in the nonseasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy (CPI-U for March compared with the CPI-U for September of the same year, and then CPI-U for September compared with the CPI-U for March of the following year).
Interest is earned on the bond every month. The interest is compounded semiannually: twice a year, the interest the bond earned in the previous six months is added to the bond’s principal value; then, interest for the next six months is calculated using this adjusted principal.
The interest and principal are paid to you when you cash the bond.
| How long must I keep an I bond? | I bonds earn interest for 30 years unless you cash them first. You can cash them after one year. But if you cash them before five years, you lose the previous three months of interest. (For example, if you cash an I bond after 18 months, you get the first 15 months of interest.) |
| Maximum purchase | Electronic: $10,000, total, each calendar yearPaper: $5,000, total, each calendar year |
Sources:
https://www.cnbc.com/select/what-are-i-bonds/
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm