I-bonds are issued by the U.S. Treasury. The interest rate paid by I-bonds is made up of two different components; a fixed-rate which is set by the Treasury and remains the same for the life of the bond, and a variable rate that is based on the Consumer Price Index that gets updated every 6-months. Interest earned on I-Bonds is exempt from state and local income taxes. Even though they are subject to federal income tax for the bond owner, they may be completely tax exempt if used to pay for qualified higher education expenses.
- Save in a low-risk product to protect against inflation
- Supplement retirement savings
- Give as a gift
- Tax free if used to Pay for dependent’s education
- Investors are capped at purchasing up to $10,000 worth of I-bonds per year, but you can also purchase an additional $5,000 with your tax refund to make the total annual purchase $15,000.
- I-bonds are only available online by setting up an account through TreasuryDirect or in paper form using your federal income tax refund.
- I-bonds don’t pay income while you own the bond, therefore they are not recommended as an investment that provides a steady income flow. Rather, the interest accrues and gets paid out when you sell or the bond matures. Interest is calculated monthly but is compounded twice per year. You can earn interest for 30 years unless you choose to cash the I-bond before that period is up.
- Investors cannot cash in I-bonds until one year after purchase. To not lose any interest on this investment, you must hold on to the bond for a minimum of 5 years. Otherwise, you will lose the previous three months interest.