What Are Series I Savings Bonds?

Brandon R. Amaral, CFP®, EA
Brandon R. Amaral, CFP®, EA

Founder & Financial Planner, Amaral Financial Planning

Do inflation-protected savings bonds, issued and guaranteed by the United States government, sound too good to be true? Whether you’re an avid follower of r/wallstreetbets or you’re just starting out, you may have heard that the current interest rate for I Bonds issued by the US Treasury is at 7.12%.

There are a variety of investments issued by the US Treasury, including bonds, notes, and bills. Each investment has different maturities, interest rates, and tax implications. Depending on your investment experience, risk tolerance, and time horizon, these types of investments might benefit you.

Sign up for the AFP newsletter to receive weekly updates and blog posts!

Here is a brief overview of Series I savings Bonds:

What are I Bonds?

A Series I savings bond is a security issued by the US Treasury that earns interest. The interest rate is based on two components: a fixed rate and an inflation rate (which is set twice per year). You must hold these bonds for a minimum of 1 year, but no more than 30 years.

How do you earn money?

With I Bonds, you don’t actually receive any of the interest until you cash out the bond. While you hold the bond, interest will accrue on a monthly basis and is added back to the bond amount.

The interest rate of the bond is reset every 6 months (in May and November). The fixed rate (which is currently 0%) is locked in for the life of the bond. The inflation rate (which is currently 3.56%) is locked in for the next 6 months. This means that there is no guarantee you will continue to earn the 7.12%, as it can be higher or lower depending on inflation.

How can you invest?

You can purchase the bonds electronically online, or in paper form by using your income tax refund. For electronic bonds, you can purchase $25 up to $10,000. For paper bonds, you can purchase $50 up to $5,000.

To purchase an I Bond, you must be a US citizen or resident and have a Social Security number. You can purchase them through a Trust, estate, or corporation. Parents can also purchase bonds for their children as well.

To purchase the bonds online, you will need to create an account through TreasuryDirect.

What are the tax benefits?

When it comes to investing, taxes are usually a large consideration. With I Bonds, there are some tax treatments that could benefit your situation.

First, the bonds are exempt from State income taxes. Any interest earned on the bonds is still subject to Federal income tax.

Second, if the bonds are used for qualified education expenses, then you may be able to exclude the interest from your Federal income. To qualify, the following must apply:

  • You cashed qualified U.S. savings bonds in the same tax year for which you are claiming the exclusion.
  • You paid qualified higher education expenses in that same tax year for yourself, your spouse, or your dependents.
  • Your filing status is any status except married filing separately.
  • You were 24 or older before your savings bonds were issued.
  • Your modified adjusted gross income was less than the cut-off amount set by the Internal Revenue Service. For 2021, this amount is $98,200 if you file as single and $154,800 if you file as married filing jointly.

Before purchasing I Bonds, you should consult a financial or tax advisor to help you understand the risks, your time horizon, and potential tax benefits. If you would like to work with a financial planner to walk you through your options, I would love to help you!

To learn more about becoming a client, schedule a complimentary meeting now!

Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.