Are I Bonds a Good Investment?

Series I bonds are issued by the U.S. Treasury.
Series I bonds are issued by the U.S. Treasury. (Image: Tom Brakefield/Stockbyte/Getty Images)

Series I savings bonds are savings certificates issued by the U.S. Treasury. The biggest benefit of I bonds is the interest rate earned by the bonds is indexed for inflation. Series I bonds are a safe investment and a review of the bond features can help determine if they are a good match for your investment goals.

Investing Amounts

Series I bonds are a good choice for small investment amounts. Paper I bonds can be purchased with as little as $50 and the electronic version has a minimum investment amount of $25. Bonds could be purchased as part of a regular ongoing investment plan, buying a bond every two weeks or monthly. The maximum amount of I bonds an investor can buy in one year is $5,000 of paper bonds and $5,000 of electronic I bonds for a total of $10,000.

Tax Advantaged Interest Accrual

The interest a series I bond earns accrues to the value of the bond. This makes I bonds appropriate for an investor looking for value growth over time. An I bond also compounds the interest earnings, so the interest earns interest. An I bond earns interest every month and the interest is compounded semi-annually. The interest earned on an I bond is tax deferred. The bond owner pays not taxes on the interest until a bond is cashed in. I bond interest is also exempt from state income taxes.

Inflation Indexed Interest

A series I bond earns two types of interest. Each I bond earns a fixed rate which is based on the rate for new I bonds at the time of issue. The Treasury declares a new I bond fixed rate every six months, in May and November. A series I bond also earns interest based on an inflation factor declared by the Treasury. The inflation factor is adjusted every six months. For example, an I bond purchased in November 2009 earns a fixed rate of interest of 0.30 percent. From November 2010 to April 2011, the inflation interest rate was 0.74 percent for a total interest rate of 1.04 percent. In May 2011, the inflation interest rate was changed to 4.6 percent, so the I bond would earn 4.9 percent interest for the next 6 months.

Long Term Savings

Series I bonds are meant for long term savings. The bonds have an interest penalty if redeemed within the first five years after purchase. A series I bond will continue to earn interest for up to 30 years after issue. An investor with a long term savings goal can use I bonds as an inflation hedge with the safety of a U.S. government backed savings certificate.

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