I Bonds, Explained

Last year, stock market volatility and rising inflation sent investors clamoring to purchase U.S. government-issued I Bonds. TreasuryDirect.com, the website that sells the bonds, crashed at one point because demand was so high. 

The "I" in I Bonds stands for inflation. The I Bond interest rate combines a fixed rate and an inflation rate - adjusted twice yearly based on fluctuations in the Consumer Price Index for All Urban Consumers.

When inflation rises, as it did last year, I Bonds become more lucrative. For example, in May 2022, the interest rate on I Bonds peaked at 9.62%, the highest yield since I Bonds were introduced in 1998. Now that inflation has cooled somewhat, the current rate of return (through October 31, 2023) is 4.3%.

If I Bonds sound beneficial to you, consider these rules before moving forward: 

You must hold on to an I Bond for a minimum of one year. After that, you can cash out, but you may incur a penalty (equal to three months' interest) if the bonds are redeemed earlier than year five. 

After the fifth year, there is no penalty for cashing out. I Bonds reach full maturity after 30 years. 

"The biggest pro of purchasing an I Bond is that it provides protection against inflation. There are also tax benefits. The income that you are earning is only taxable at the federal level, not at the local or state level," says Rhett Stubbendeck, CEO of LeverageRX, a financial services company for medical professionals. "One of the cons is that you cannot cash I Bonds within two to five years of purchase. Doing so will result in a penalty fee. Therefore, it is essential to consider your financial goals when purchasing these bonds."

He continues, "As a financial professional, I am considering purchasing I Bonds for my retirement, because they are a good hedge against inflation and they will make sure that my savings remain consistent with the economic situation of the country."

Speak with your trusted financial advisor to see if I Bonds could help you meet your financial goals.