i bonds are savings bonds issued by the United States Treasury. They are a safe form of long-term investment, since they are backed by the United States government and have a low risk of loss of value.
One of the main features of i bonds is that they offer a compound interest rate, which means that interest accumulates over time and is paid along with the face value of the bond at maturity. In addition, i bonds offer inflation protection, which means that the interest rate on i bonds automatically adjusts to reflect the rate of inflation.
Another advantage of i bonds is that they are exempt from state and local taxes, making them attractive to investors looking to maximize their investment returns.
Requirements to buy i bonds
In order to purchase i bonds, certain requirements must be met, including:
- Be a US citizen or resident of the United States.
- Be at least 18 years old.
- Have an account on the US Treasury website, which can be created online for free.
- Have a mailing address in the United States.
- Have a bank account in the United States that allows the purchase of i bonds.
It is important to note that i bonds are not sold at all financial institutions. Only some financial institutions, such as banks and credit unions, sell i bonds in paper form. Electronic i bonds can only be purchased online through the US Treasury website.
Also, it is important to note that there is a maximum limit on the number of i bonds that can be purchased in a calendar year. Starting in 2023, the limit is $10,000 in electronic purchases of i bonds per person and another $5,000 in paper purchases of i bonds per person.
Before purchasing i bonds, it is a good idea to review the terms and conditions of the purchase, including interest rates, maturity dates, and redemption terms.
I bond purchase limits
There are certain limits on the number of i bonds that can be purchased per person, per calendar year and per transaction. The purchase limits for i bonds are described below:
- Minimum Amount: The minimum amount of i bonds that can be purchased is $25 for both paper and electronic i bonds. This means that i bonds can be purchased in $25 increments, up to a maximum amount.
- Maximum Amount: The maximum amount of i bonds that can be purchased in a calendar year is $10,000 for electronic purchases and $5,000 for paper purchases. This means that an individual can purchase up to $15,000 worth of i bonds in a calendar year, as long as $10,000 worth of electronic bonds and $5,000 paper bonds are purchased, or a combination of both.
- Limit per transaction: The limit per transaction for the purchase of i bonds online is $10,000. If you want to buy more than $10,000 in electronic i bonds, you must make multiple transactions.
It is important to note that these limits are subject to change and may vary from year to year. Therefore, it is important to check the US Treasury website for up-to-date information on i bond purchase limits.
In general, i bond purchase limits are designed to prevent over-purchasing and maintain the attractiveness of i bonds as a safe and stable investment.
i-bond types
There are two types of i bonds that can be purchased: electronic i bonds and paper i bonds. The main differences between both types of i bonds are described below.
Electronic i bonds are those purchased through the US Treasury website. They are issued in digital form and held in an online account. The purchase process is simple and easy, and electronic i bonds can be purchased in $25 increments, up to a maximum amount of $10,000 in a calendar year. Electronic i bonds earn interest monthly, which accumulates and is paid at maturity. Also, electronic i bonds can be easily converted to paper and vice versa. Electronic i bonds are a convenient option for those who prefer to manage their investments online and don’t want to worry about physical custody of the bonds.
Paper i bonds, on the other hand, are purchased through a financial institution, such as a bank or credit union. These i bonds are issued in paper form and must be kept in a safe place. Like electronic i-bonds, paper i-bonds earn interest monthly and accumulate until maturity, at which time the money can be withdrawn or reinvested. Paper i bonds have a minimum purchase amount of $25 and a maximum purchase amount of $5,000 in a calendar year. It’s also important to note that paper i-bonds have become less common as many banks no longer sell them and can only be purchased directly through the Treasury Department.
I bond interest rate
The i bond interest rate is made up of two parts: a fixed rate and a variable rate. The fixed rate is set at the time the i bond is purchased and remains constant throughout the life of the bond. On the other hand, the variable rate is adjusted twice a year, based on the inflation rate.
The fixed rate for i bonds is determined based on market conditions at the time of purchase. In May 2021, the fixed rate for i bonds was 0.00%. This means that if someone bought an i bond at that time, their initial interest rate would be 0.00%.
The variable rate, on the other hand, is based on the rate of inflation. The variable rate is adjusted twice a year, in January and July, and is based on the Consumer Price Index (CPI). If the CPI goes up, the variable rate also goes up, which means the i bond will earn more interest. If the CPI goes down, the variable rate also goes down, which means that the i bond will earn less interest.
For example, suppose someone buys an i bond with a fixed rate of 0.00% and a variable rate of 2.50% in January 2023. If the annual inflation rate is 6.50% in January 2023, The variable rate will adjust to 6.50%, meaning the i Bond will earn total interest of 6.50% for that year. However, if the annual inflation rate is only 3.00% in July 2023, the variable rate will adjust to 3.00%, which means that the i bond will only earn 3.00% total interest for this year.
Maturity and how i bond value is calculated
The i bonds have a maturity of 30 years from the date of issuance. During this 30-year period, the i bond may earn interest at either a fixed or variable rate, depending on the issue date and interest rates at the time.
On the maturity date, the i bond will cease to earn interest and its final value will be calculated based on the face value of the i bond plus any interest accrued over its useful life. The face value of the i bond is equal to the purchase price, that is, what the investor paid for the i bond at the time of purchase.
The interest rate of the i bonds can be fixed or variable. For fixed rate i bonds, interest accrues at a fixed rate for the life of the i bond. To calculate the accrued interest in this case, multiply the fixed rate by the face value of the i bond and by the number of years that have passed since the i bond was issued.
For i-bonds with a variable rate, interest accrues at a rate that changes every six months based on the Consumer Price Index (CPI). Interest is calculated by adding the i bond’s fixed rate to the time-adjusted inflation rate (ie, the inflation rate over the past six months) multiplied by the i bond’s face value.
When an i bond matures, the investor has several options. One option is to keep the i bond and continue to accrue interest. However, since the i bond no longer earns interest, this may not be the best option. Another option is to redeem the i bond at a participating bank or on the US Treasury website. In this case, the investor will receive the face value of the i bond plus any interest accrued at that time.
It is also important to note that i bonds can be transferred as a gift or inheritance, and in certain circumstances may be exempt from federal income tax, although the interest earned is subject to federal and state income tax.
Advantages and disadvantages of i bonds
i bonds have several advantages and disadvantages as an investment. Here are some of the main ones:
Advantages:
- Security: i bonds are issued by the United States Treasury, which makes them a very safe investment. The risk of default is practically nil.
- Protection against inflation: The interest rate of the i bonds is made up of a fixed rate and a variable rate that is adjusted semi-annually based on the consumer price index (CPI), which means that the interest of the i bonds is protected against inflation.
- State Tax Exemption: The interest earned on i bonds is exempt from state tax, making it an attractive option for investors looking to minimize their tax burden.
- Liquidity: i bonds are redeemable after a one-year waiting period, which means they are relatively liquid. In addition, i bonds can be redeemed at any time after five years without penalty.
Disadvantages:
- Low return: The interest rate on i bonds is often lower than that of other investment instruments such as corporate bonds, which means that their long-term return may be limited.
- Waiting period: Unlike other investment instruments, i bonds are not designed to be a short-term investment, as a waiting period of one year is required before they can be redeemed.
- Limitation on purchases: The annual purchase limit of $10,000 per individual may be a limitation for those looking to make large investments in i bonds.
- They are not tradable in the secondary market: Unlike corporate bonds, i bonds are not tradable in the secondary market, which means that they cannot be sold before the maturity date.
Tips: How to buy i bonds
If you are considering buying i bonds, there are some useful tips to keep in mind before investing. Here are a few:
- Compare interest rates: Although i bond interest rates are set by the US Treasury, some financial institutions may offer slightly different rates than the market. Be sure to compare the rates offered by different financial institutions before making your investment.
- Have a long-term investment plan: i bonds are a long-term investment and are designed to be held for several years. Before you invest, it’s important to have a long-term investment plan that takes into account your financial goals and how long you plan to hold your i bonds.
- Consider inflation: i bonds are designed to protect your investment against inflation. However, it is important to note that inflation can vary over time and affect the value of your i bonds. Be sure to consider inflation when choosing your i bonds and planning your investment.
- Diversify your portfolio: i bonds can be a good option as part of a diversified investment portfolio. Be sure to consider other investment instruments in your portfolio, such as stocks and other types of bonds, to minimize risk and maximize return.
- Be aware of purchase limits: As mentioned above, there is an annual purchase limit of $10,000 per individual for i bonds. If you are considering making a large investment, you may need to plan your purchases over several years to avoid exceeding this limit.
- Consider taxes: Although the interest earned on i bonds is exempt from state tax, it may still be subject to federal tax. Be sure to consider the tax impact of your i bonds when planning your investment.