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I Bonds: Benefits, Risks, and How to Buy Them Thumbnail

I Bonds: Benefits, Risks, and How to Buy Them

By Angela Dorsey

U.S. savings bonds have long served as relatively low-risk, dependable investments. Backed by the federal government, savings bonds generate predictable growth and provide tax benefits when they’re used for education. Since 1998, the government has offered an alternative bond to hedge against inflation and maximize spending power: I Series savings bonds. But what are I bonds exactly?

I bonds were developed to counter rising inflation eroding the value of traditional savings bonds. Reliable as those bonds are, their purchasing power declines as the costs for goods and services increase. I bonds work in tandem with standard economic cycles and actually gain in value during times of inflation.

Are these bonds appropriate avenues for your investment dollars? Take a closer look.

What Are I Bonds Compared to Traditional Bonds?

With traditional savings bonds, investors are paid interest according to fixed rates over regular time spans. Fixed rates are calculated with the principal value of the bond, which is paid out in full when the bond matures.

However, traditional bonds are subject to the effects of inflation. The fixed-rate payments lose value as prices for consumer goods and services rise, potentially risking a negative balance on the bond.

For example, if you purchased a traditional savings bond before October 31, 2022, its fixed interest rate was 9.62% over the first six months. In January 2024, this rate dropped to 2.70%, eroding a significant portion of the bond’s value.

The interest rates for I Series bonds are split in two: a fixed rate and an inflation rate. As of July 2024, the fixed interest rate for I bonds is 1.30%. The inflation rate—changed semi-annually—is currently 2.96%. The inflation rate reflects adjustments in the Consumer Price Index (CPI)

I Series bonds combine both rates into a composite rate. On May 1 and November 1 of every year, the Federal Reserve sets new interest rates based on economic performance over the preceding six months. These changes are reflected in the inflation rates of the I bond.

What Are I Bonds’ Advantages?

What are the main benefits of I bonds? They are particularly helpful to conservative or passive investors who struggle with the complexity of other investment options like mutual funds. I bonds are simple, low-risk options for consistent growth. They’re especially beneficial to bond buyers who are saving up for major financial moves, such as retirement.

I bonds can be held for up to 30 years. This encourages saving for the long term, which is almost always a beneficial stance to take. There’s almost no risk of default with I bonds since they’re backed by the federal government. At the bond’s maturation, the holder receives the entire amount of their paid principal and accrued interest.

Those saving for college with 529 or tax-advantaged plans may find I bonds exceptionally helpful. If the I bond is earmarked for higher education, its earnings are tax-exempt.

What Are I Bonds’ Disadvantages?

There are a few minor drawbacks to I bonds. When you purchase one, your money is tied up for 12 months. If you anticipate that you’ll need to make a major cash purchase in the next year, you may want to wait to invest in an I bond. You may also lose three months of interest if you cash in your bond within the first five years.

Inflation rate adjustments can be unpredictable, especially since they’re changed only twice a year. That can make the first six months of holding an I bond a bit daunting when accounting for your investment budget. Because of these factors, the true value of an I bond may not be certain until several years after it’s been purchased.

How Can I Purchase I Bonds?

You can buy I bonds directly through the treasury using the Treasury Direct website. You cannot purchase these bonds through any custodian (such as Fidelity, Schwab, Pershing, etc.) and Dorsey Wealth Management cannot manage these monies. 

Interested in Learning More About I Bonds?

So what are I bonds, and are they right for you? These bonds are designed to counter the effects of inflation. A knowledgeable financial advisor can help you determine whether these bonds can benefit you.

As a fee-only advisor at Dorsey Wealth Management, I look for the best investment opportunities for both current and prospective clients. If you’d like to learn more, contact us online or schedule a free introductory 30-minute phone call. You can reach us at (310) 370-7776 or angela@dorseywealth.com.

About Angela

Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER™ professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.