FAQs: Series I Bonds

Inflation has been a constant topic of conversation in just about every walk of life over the last year. It’s no surprise that I’ve gotten numerous questions recently on Series I Bonds, which were designed to adjust based on inflation.

I think a FAQ on Series I Bonds is in order.

What are Series I Bonds?

These bonds are savings bonds issued directly by the US Department of Treasury.

How much do they cost?

The bonds can be purchased in amounts from $25 to up to $10,000 per year per person.  

How do they work?

Series I Bonds have two pieces, the base (fixed) rate and inflation rate, which combine to create the actual rate of the bond, known as the composite rate. The base rate, which is currently 0.00%, remains the same throughout the life of the bond. The inflation rate is adjusted every May and November based on the Consumer Price Index (CPI) for urban consumers, known as CPI-U.

What is the current rate?

As mentioned above, the current base rate is 0.00%. The current inflation adjustment is 7.12%. Therefore, the composite rate is 7.12%. Please note that is an annual rate, so for the six-month period, the actual return is 3.56%.

Could the rate go negative?

The composite rate has a floor of 0.00%. Even if we encounter a disinflationary environment, you won’t have to pay the government to hold Series I Bonds.

Are these bonds taxable?

Yes and no. Interest from Series I Bonds is not taxable at the state and local level, but is at the federal level unless the proceeds are used to pay for higher education.

When does the interest get paid?

Unlike a typical bond, Series I Bond payments don’t come to the owner as a distribution. Instead, the “payments” are added to the value of the bond, compounding over time.

Are the bonds liquid?

Kind of. Series I Bonds are 20-year bonds, with the ability to extend an additional 10 years. Holders may redeem them beginning one year from issuance, but there is a penalty if they are redeemed before the 5-year mark. They are not available to buy or sell in the secondary market.

Are there any other potential drawbacks?

Of course! The biggest, for me, is that the interest rate adjustment is based on annual change, not change from the issuance date. Say, for example, that John Doe buys Series I Bonds right after the rates adjust in May, and for this example, let’s say that the annual rate is 8% (4% for six-months). At the November adjustment, inflation has slowed to an annual increase of just 4% (2% for six months). At the 1-year mark, John has made 6% on his bond. A nice return, yes, but probably not what he was hoping for. At that point, John decides that inflation has stabilized at around 3% and feels there are better places for his money. He can redeem his Series I Bonds after one year, but is required to give up three-months’ worth of interest as a penalty, dropping his return to 5% before taxes.

Should I buy Series I Bonds?

The answer to that is a solid maybe! It depends on many factors, including your liquidity needs, tax bracket, and your view of future inflation, among many others.

If you want to learn more about Series I Bonds, please click here.

Photo by Marcel Eberle on Unsplash