Should You Buy I Bonds? What They Are and Who They Work For

I Bonds pay you interest that moves with inflation, but they lock your money away for a year and penalize early withdrawal

I Bonds (Series I Savings Bonds) are issued by the U.S. Treasury and designed to protect your purchasing power when prices rise. The interest rate has two parts: a fixed rate set when you buy, plus a variable rate that adjusts every six months based on inflation. Right now, that combination makes them worth examining if you have money you won't need for at least five years.

Whether they're a good choice depends on what you're trying to do with the money. I Bonds are not a path to wealth. They won't beat a stock market that's rising. But they also won't lose value to inflation the way a savings account does when rates are low. They work best for money you're setting aside for a specific goal years away, or as a small portion of a larger plan to reduce risk.

Key Takeaways

• I Bond interest rates reset every six months and include both a fixed component (locked in when you buy) and an inflation component (adjusted based on the Consumer Price Index).
• You cannot withdraw money penalty-free until you've held the bond for at least one year, and if you sell before five years, you lose the last three months of interest.
• The maximum you can buy is $10,000 per person per calendar year in electronic bonds through TreasuryDirect, plus another $5,000 if you use your tax refund.
• I Bonds are backed by the U.S. government and carry no market risk, making them useful for money you need to preserve but not access immediately.
• Current interest rates and historical performance matter less than your actual timeline and whether you have other savings for emergencies.

How I Bond interest rates work and why they change

The interest you earn on an I Bond comes from two sources. The fixed rate is set the day you buy and never changes—it's your may provide. The inflation rate is calculated every six months by the Treasury based on changes in the Consumer Price Index (CPI-U), the most common measure of inflation. These two rates are added together to give you your composite rate for the next six months.

When inflation is high, your I Bond rate goes up. When inflation falls, your rate falls too. The fixed rate has been as low as 0% in recent years and as high as 3.6% in the early 2000s. The inflation component can swing much wider—it was 3.94% in May 2024 and has been negative (meaning deflation) in some periods. You can see the current rates and historical rates on the TreasuryDirect website before you buy.

This design protects you from one specific risk: the loss of purchasing power. If you buy an I Bond when inflation is 5%, and inflation stays at 5%, your money grows at roughly 5% per year (plus whatever fixed rate was set). A regular savings account earning 0.5% would lose ground. But I Bonds also mean you're betting that inflation won't fall dramatically—if it does, your rate falls with it.

The one-year lock and the five-year penalty

I Bonds have two withdrawal rules that matter. First, you cannot cash them in at all for one year after purchase. If you need the money before that year is up, you're stuck. Second, if you sell between one and five years, you lose the last three months of interest as a penalty. After five years, you can withdraw without penalty.

This structure is why I Bonds work only for money you genuinely won't touch. If you're building an emergency fund, I Bonds are the wrong tool—put that money in a high-yield savings account where you can reach it instantly. If you're saving for a house down payment you might need in three years, the three-month penalty could cost you hundreds of dollars. But if you're setting aside money for a goal that's at least five years away, the penalty disappears and the lock-in becomes irrelevant.

The one-year rule also means you should not buy I Bonds with money you might need for unexpected expenses. The Treasury will not make exceptions. You buy them, and for twelve months, that money is gone from your perspective.

Purchase limits and how to buy

You can buy a maximum of $10,000 per person per calendar year in electronic I Bonds through TreasuryDirect, the Treasury's official website. If you receive a federal tax refund, you can buy an additional $5,000 in paper bonds by requesting them on your tax return (Form 8888). That $5,000 limit is separate from the $10,000 electronic limit, so a married couple could theoretically buy $30,000 combined in a single year ($10,000 each electronic, plus $5,000 each from refunds).

To buy electronic I Bonds, you create an account on TreasuryDirect.gov, verify your identity, link a bank account, and purchase in $25 increments. The process takes about 15 minutes. You own the bonds immediately, and interest begins accruing the first day of the month in which you buy. Paper bonds purchased through tax refunds arrive by mail and work the same way.

There is no broker fee, no commission, and no markup. You pay face value. This is one genuine advantage over other fixed-income investments—you're buying directly from the issuer.

I Bonds versus other places to put money you won't touch

The main competitor to I Bonds is a high-yield savings account or a short-term Treasury bill. A high-yield savings account currently pays 4% to 5% APY at many banks, with no lock-in period and FDIC insurance up to $250,000. If inflation stays low, a high-yield savings account will likely beat an I Bond. If inflation rises sharply, an I Bond will catch up and potentially pull ahead. The tradeoff is flexibility: the savings account lets you access your money anytime; the I Bond does not.

Treasury bills (T-bills) are another option. You can buy them in three-month, six-month, one-year, or two-year terms directly from TreasuryDirect. They currently pay 5% to 5.3% depending on the term. Unlike I Bonds, T-bills have no penalty for early withdrawal—you can sell them on the secondary market anytime. But they don't protect you from inflation the way I Bonds do. If you buy a one-year T-bill at 5% and inflation jumps to 7%, you've locked in a loss of purchasing power.

For money you're certain you won't need for five years, I Bonds make sense if you believe inflation will remain elevated. For money you might need sooner, or if you want the option to access it without penalty, a high-yield savings account or T-bills are more flexible.

Tax treatment and who should consider I Bonds

I Bond interest is subject to federal income tax, but not state or local income tax. You can choose to pay tax each year as interest accrues, or defer all taxes until you cash the bond. Most people defer, which means you don't file anything until you redeem. At that point, you report the total interest earned on your tax return for that year.

There is one tax break: if you use I Bond proceeds to pay for may have access to education expenses (tuition and fees at an accredited school), you may be able to exclude the interest from federal income tax entirely. This applies only if your income is below certain thresholds and you meet other conditions. The IRS Form 8815 explains the rules. This education exclusion makes I Bonds worth considering if you're a parent or grandparent saving for college and your income qualifies.

I Bonds work best for people in these situations: you have a specific goal five or more years away; you have an emergency fund already in place; you believe inflation will stay moderate to high; and you can afford to have the money unavailable for at least a year. They don't work for people who need flexibility, who are saving for a goal less than five years away, or who have other investment options that historically outpace inflation (like a diversified stock portfolio).

The real question: what are you actually saving for?

I Bonds are not an investment in the traditional sense—they're a way to preserve money. They won't make you wealthy. They won't beat the stock market over a 20-year period. What they do is keep your money from losing value to inflation while you wait for a specific moment to use it.

Before you buy, ask yourself: Do I have an emergency fund? Can I afford to lock this money away for a year? Will I need it before five years? If you answered no to the first two questions or yes to the third, I Bonds are not the right choice. If you answered yes, yes, and no, they're worth considering as part of a larger financial plan.

Frequently Asked Questions

Can I lose money in an I Bond?

No. I Bonds are backed by the U.S. government, and the principal never declines. The worst case is that your interest rate falls to near zero if inflation drops sharply, but you won't lose the money you put in. The only way to lose interest is to withdraw before five years, which triggers the three-month penalty.

What happens if I need the money before one year?

You cannot withdraw it. The Treasury will not make exceptions. This is why I Bonds are only for money you're certain you won't need. If there's any chance you'll need it within a year, use a savings account instead.

Do I Bonds keep up with inflation?

They're designed to, but it depends on the inflation measure. I Bonds track the Consumer Price Index for All Urban Consumers (CPI-U), which is the broadest inflation measure. Your personal inflation rate might differ if you spend differently than the average—for example, if you spend heavily on healthcare or housing, which can inflate faster than the overall index.

Can I buy I Bonds for someone else?

Yes, you can buy them as gifts for children or other people. You create an account on TreasuryDirect, and the bonds are registered in the recipient's name. They own them, and they control when to redeem. This is a common way for grandparents to save for grandchildren's education or future goals.

What's the difference between I Bonds and EE Bonds?

EE Bonds have a fixed interest rate that never changes and are may provide to double in value in 20 years. I Bonds have a variable rate tied to inflation. EE Bonds are better if you believe inflation will stay low; I Bonds are better if you believe it will stay moderate to high. Both have the same one-year lock and five-year penalty.