How to Buy I Bonds

·12 min read
Money; Alamy Stock
Money; Alamy Stock

The federal government, of all entities, offers one of the most sought-after investments of 2022: the Series I Savings Bond, aka the I bond.

Soaring inflation has pushed the annualized interest rate of the I bond to a record-setting 9.62% until the end of October. I bonds offer a safe place to park savings that’s shielded from the volatility of the stock market and rapidly rising consumer prices, which eat away at the value of money tucked away in traditional savings accounts.

Because of these perks, the I bond went from a relative obscurity to a hot commodity over the past year.

For the current 9.62% payout alone, I bonds might sound like a no-brainer investment. However, the process of buying them can be a slog, and there are a few big caveats about the savings bonds that you should know before you buy.

How to buy Series I bonds

The U.S. Treasury Department, the federal body that issues I bonds, offers two purchase methods. The main way is to go online using TreasuryDirect.gov, and the I bonds bought through this website are digital. There’s also an entirely separate way to purchase paper I bonds. Neither is simple, but we’ll walk you through both options below.

Buying I bonds digitally

1. Open an online TreasuryDirect account

Unless you are about to file your federal income taxes and can accurately estimate your tax refund, you’re going to want to start by purchasing digital I bonds.

The only way to do so is by setting up an account on TreasuryDirect.gov.

Be forewarned: The website is clunky. It was launched in 2004 and doesn’t look as if it’s been visually updated since. The entire process of setting up an account and purchasing I bonds took me about 20 minutes, though this could certainly be a low estimate if you put in the wrong information or have a low patience threshold.

On the website’s homepage, select “open an account” on the right-hand side. Be sure to choose a “TreasuryDirect” account (not a FedInvest or SLGSafe account). After following the prompts, you’ll need to provide your information under penalty of perjury.

You’ll need the following details:

  • First and last name

  • Date of birth

  • Residential address

  • Tax Identification Number (read: Social Security number)

  • Name of the bank that you want to link to your Treasury account

  • Bank routing and account numbers

Pro tip: Before you submit your information triple check the bank account number you’re filling in is truly the correct checking or savings account you want to use to purchase your digital I bonds.

Changing your bank details after the fact requires filling out Form 5512 in the presence of an “authorized certifying official” at a bank, trust company or credit union. (No, a regular old Notary Public won’t suffice.) You’ll then need to mail the form and await the Treasury Department’s response via email.

2. Log in to your TreasuryDirect account

Once your account is fully set up, TreasuryDirect will send you an automated email with your account number. This account number acts as a username. Do not lose or forget it.

It’s a randomly generated letter followed by a series of nine numbers, i.e. Z-987-654-321.

After receiving your account number, return to the TreasuryDirect website and use it to log in.

If it’s the first time logging in on your computer, smartphone or other device, you will also need an “OTP” (a one-time password). This will come via email after you’ve inputted your account information.

Note: When you’re inputting your password (the one you chose when opening your account — not the OTP), the website will not detect the keystrokes from your keyboard. You’ll need to use the virtual keyboard that should display on the page, selecting each character one at a time. It is not case sensitive.

3. Buy your digital I bonds

Now that you’re able to open an online account with the Treasury Department and log in without issue, you can buy I bonds fairly easily.

From your account dashboard, select the “BuyDirect” tab at the top of the page and choose “Series I” under the “Savings Bonds” section. After that, simply follow the prompts to purchase the amount you want.

We’ll cover this more below, but bear in mind that you have a $10,000 digital I bonds purchase limit each year.

For each transaction, you’ll need to purchase at least $25 worth. After that amount you can even specify by the penny. If you wanted to, for example, you could purchase $33.33 worth of I bonds.

Click submit once you’ve put in the correct amount. By default, the transaction will go through the same day. You can also schedule repeat purchases weekly, biweekly, monthly, quarterly, and so on. The site lets you schedule purchases on any date of your choosing, too. (Again, just be sure your annual total doesn’t exceed $10,000.)

When you submit your purchase, you should receive an email confirmation. Shortly after, your I bond value will display in the “Current Holding” section of your account.

Buying paper I bonds

On Dec. 31, 2011, the Treasury Department largely phased out the sale of paper I bonds. Before that, you could purchase paper I bonds at banks and other financial institutions.

Now, only one method remains: You must fill out IRS form 8888 to elect part or all of your refund money go toward buying paper I bonds — up to $5,000 and in multiples of $50 (i.e., $50, $100, $150, and so on).

The paper I bond purchasing limit is in addition to the digital I bond limit. Theoretically, you can buy up to $15,000 worth of I bonds per year, assuming your tax refund is at least $5,000.

According to the Treasury Department, if you aren’t getting a tax refund, you can’t purchase paper I bonds.

Additionally, the Treasury Department says that if an error on your tax return lowers your estimated refund, your I bond purchase will be canceled. If the error increases your refund, your purchase will still go through.

Your paper I bonds will arrive in the mail, likely several weeks after you file your taxes to the IRS. After the IRS processes your tax return and submits your payment to the Treasury Retail Securities Site in Minneapolis, you should receive your paper I bonds three weeks later.

What are I bonds?

I bonds are U.S. savings bonds issued by the Treasury Department that are specifically designed to keep inflation from eating away at the buying power of your money.

“I-Bonds are designed to offer all Americans a way to save that protects the purchasing power of their investment while assuring them a real rate of return over and above inflation,” the Treasury Department said in a Sept. 1, 1998 announcement, the first day I bonds went on sale.

I bond experts often say a good way to think about them is like an inflation-protected savings account that’s backed by the full faith and credit of the United States.

While all investments carry some risk, no investment is safer than an I bond, Zvi Bodie, a financial author and professor emeritus of Boston University, previously told Money. Historically, the U.S. government has never defaulted on bonds, he noted. Not even during the Civil War or the American Revolution.

How do I bonds work?

I bonds have two separate interest rates that are announced every six months, on the first business days of May and November. A combination of these two rates make up the overall “composite” rate. Right now, the composite rate is 9.62%.

Here’s a closer look at how the two different interest rates work.

One interest rate is called the “variable” rate. It is based on the previous six months worth of inflation data. No matter when you buy your I bond, this rate will change six months later. If inflation goes up, your variable rate will go up. If inflation goes down, your variable rate will go down as well. The variable rate can never drop below zero — even in times of deflation (when the inflation rate goes negative).

The other interest rate is called the “fixed” rate. As its name suggests, this rate is locked in for the entire lifespan of the I bond — 30 years or the date you sell it, whichever is sooner.

The fixed rate is determined at the date of purchase. If you purchase an I bond with a 0% fixed rate, it will never change. (But the variable rate can and will change, depending on inflation.)

Historically, the fixed rate has ranged from 0% to 3.6%. Since May 2020, the fixed rate has been stuck at 0%.

Together, these two rates preserve (and, in some cases, increase) the purchasing power of your savings.

For example, folks who purchased I bonds way back between May and October of 2000 locked in a fixed rate of 3.6% — the highest it has ever been — until 2030. They’re currently enjoying the yield from two record-high I bond interest rates.

Their composite rate right now? A whopping 13.39%.

Are I bonds a good investment?

I bonds are one of the safest investments you can make, but that doesn’t mean they don’t carry some risk. With inflation as high as it is, hordes of investors are flocking to them for a safe place to park their cash.

In addition to being a safe hedge against inflation, I bonds offer tax perks. Interest earned from I bonds is exempt from state and local taxes, and you will only pay federal taxes on the interest when you cash them out. Another tax benefit? You can avoid paying even federal income taxes on I bonds if you are using them for qualified higher-education expenses, such as tuition and fees for most colleges, universities or vocational schools.

Another unique feature of I bonds is how the interest accrues. The Treasury Department says that you will still get a full month’s worth of interest no matter if you purchase your I bond on the first or last business day of the month.

However, there are a few big caveats. For one thing, I bonds can’t be cashed out within the first year. (There is an exception for emergency situations.) Similarly, if you cash out an I bond within five years of purchase, you will miss out on the final three months worth of interest.

As mentioned above, you are also limited in how much you can invest annually — $10,000 per person for electronic I bonds and $5,000 worth of paper I bonds. Given that you have to elect to use your tax refund money to purchase the paper versions, it’s unlikely that you’ll reach the full $15,000 annual cap. (The average American doesn’t receive a tax refund of at least $5,000, and some don’t get refunds at all.)

Experts recommend I bonds as a good fit for those looking to use them to hedge against inflation — which is exactly what they were designed for.

But they aren’t for everyone, particularly those looking for a moneymaking investment. Because of the withdrawal limitations, they’re also not the best option for folks who don’t yet have an emergency savings fund built up.

Here are some other pros and cons to consider.

Pros

  • 9.62% variable interest rate

  • Designed to protect savings from inflation

  • Tax deferred interest

  • Interest exempt from state and local taxes

  • Exempt from federal taxes if used toward higher education expenses

  • Fairly liquid investment

  • 30-year maturity

  • Backed by full faith of U.S. government

Cons

  • Limited potential for real earnings

  • Annual purchase limit of $15,000 per individual, $5,000 of which is only purchasable with your tax refund

  • Can not be cashed out within one year (emergency notwithstanding)

  • Three month interest penalty for cashing out within five years

  • Not as liquid as a regular savings account

  • Must open account with clunky TreasuryDirect.gov

Should you buy I bonds now?

If you’re looking at the yield on your savings account (which is probably well below 1% right now) and you’re worried about inflation eating away at your money’s buying power, now could be a great time to look into I bonds, which boast interest rates at an all-time-high of 9.62%.

The interest rate will stay at 9.62% until the first business day of November. On that day, the Treasury Department will announce a new rate based on inflation and possibly set a new fixed rate.

Because of the unique way the interest rates work on I bonds, if you buy one any time between now and November, you will lock in a full six months of 9.62% interest. Guaranteed. Then, your interest will compound, be added to your bond’s principal value and then your rate will change to the new rate that’s announced in November.

For example, if you purchased an I bond any time in August, you’d receive an annualized rate of 9.62% for six months.

Even in a catastrophic (and highly unlikely) scenario where the interest rate in November drops to 0%, you can still predict your return for the year: 9.62% between August and January and then 0% between February and July. Your worst-case scenario? An annual return of 4.81%.

By comparison, the national average interest rate for savings accounts right now is 0.1%, according to the FDIC.

So if inflation is eating away at your savings (and you’re well aware of the withdrawal caveats mentioned above,) I bonds are looking like a pretty good deal right now.

More from Money:

How to Buy Stocks

How to Save Money

How to Save Money on Gas

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