I-Bonds Explained: How They Work, Current Rate, and When They Beat HYSA
Series I Savings Bonds — known as "I-Bonds" — are inflation-adjusted savings bonds backed by the U.S. Treasury. The interest rate has two components, one of which resets every 6 months to track inflation, so your purchasing power can't be eroded by rising prices. The catch: the annual purchase limit is just $10,000 per person, and you have to hold them for at least a year. Here's how the math works, when they beat a high-yield savings account, and how to buy them.
1. What an I-Bond Is
An I-Bond is a U.S. Treasury savings bond designed to protect against inflation. You buy it at face value, it earns interest for up to 30 years, and at the end you redeem it for the original principal plus accumulated interest. Backed by the full faith and credit of the U.S. government — there is no credit risk.
The defining feature is the composite rate. Unlike a regular Treasury bond that pays a fixed coupon, an I-Bond's rate has two components:
- Fixed rate — set at purchase, stays the same for the bond's 30-year life
- Inflation rate — based on CPI-U, resets every 6 months on May 1 and November 1
The combination means your real return is preserved across inflation regimes. If inflation runs at 8%, your I-Bond rate adjusts to roughly 8% plus the fixed component. If inflation drops to 1%, your rate drops too — but never below the fixed rate.
2. The Composite Rate Formula
The Treasury publishes the formula explicitly:
+ (fixed rate × semiannual inflation rate)
Worked example with fixed rate = 1.30% and semiannual inflation rate = 1.69%:
= 0.0130 + 0.0338 + 0.00022
= 0.04702 → 4.70% annualized
The third term (fixed × semiannual) is small but mathematically important — it ensures the real return floor is the fixed rate, regardless of inflation level.
The composite rate cannot go negative. If deflation pushes the inflation component below zero, the floor is the fixed rate. If both fixed and inflation are zero, the bond pays 0% — but never loses principal.
3. How the Rate Resets Every 6 Months
The Treasury announces new rates on May 1 and November 1 each year. Two things change:
- The fixed rate for new purchases from that date forward
- The inflation rate component for all existing bonds at their next anniversary
Important detail: an existing bond's inflation rate updates on its anniversary month, not on May 1/November 1 globally. If you bought your bond in January 2026, the November 1, 2026 rate change affects you starting in January 2027 (your bond's 6-month anniversary).
Historical context for I-Bond composite rates:
| Period | Composite rate | Context |
|---|---|---|
| May 2022 - Oct 2022 | 9.62% | Peak inflation period — record I-Bond demand |
| Nov 2022 - Apr 2023 | 6.89% | Inflation cooling, still elevated |
| May 2023 - Oct 2023 | 4.30% | Inflation moderating |
| Typical 2010-2020 | 0.5% - 2.5% | Low-inflation environment |
| Typical 2000-2008 | 4% - 6% | Higher fixed rates and moderate inflation |
4. Purchase Limits and How to Stack Them
The base limit is restrictive — but stackable:
- $10,000/year electronic per person, via TreasuryDirect
- +$5,000/year paper via federal tax refund (Form 8888)
Practical stacking strategies:
| Setup | Annual maximum |
|---|---|
| Single individual | $10,000 + $5,000 paper = $15,000 |
| Married couple | $20,000 + $5,000 joint paper = $25,000 |
| Married couple + 2 kids (custodial) | $40,000 + $5,000 = $45,000 |
| Living trust (separate from individual) | + $10,000 per trust |
| LLC or sole proprietorship | + $10,000 per business entity |
For most savers, the personal $10,000 limit (or $20,000 for couples) is the practical cap. The trust and business stacking is real but adds administrative overhead most don't need.
5. The Lockup and Early-Withdrawal Penalty
I-Bonds have liquidity restrictions:
- Months 0-12: cannot redeem. Money is fully locked.
- Months 12-60 (year 1-5): can redeem, but forfeit the most recent 3 months of interest.
- After 60 months (5+ years): can redeem with no penalty.
- 30 years from purchase: bond stops earning interest. Must be redeemed.
The 3-month interest penalty between years 1-5 sounds harsh but is usually mild. On a $10,000 I-Bond at 5% composite rate, the penalty is roughly $125 — meaningful but not punishing. Most investors who buy I-Bonds plan to hold at least 5 years anyway, so the penalty rarely matters.
6. Tax Treatment — and the Education Exclusion
I-Bond tax treatment is friendly:
- Federal income tax: owed on interest at redemption (or maturity), or annually if you elect accrual reporting. Most investors defer.
- State and local income tax: exempt. Worth 5-13% of interest in high-tax states.
- Education exclusion: if you use I-Bond proceeds for qualified higher-education expenses, the interest may be fully federal-tax-free, subject to MAGI phase-outs (~$96,000-$111,000 single, ~$145,000-$175,000 married).
The state-tax exemption alone can be a deciding factor. A New York resident in a 6% state bracket holding $10,000 of I-Bonds at 5% earns ~$500/year. Saving 6% state tax on that interest is $30/year — small in absolute terms but pure efficiency vs HYSA interest, which is fully state-taxable.
7. I-Bonds vs HYSA, CDs, TIPS
| Property | I-Bond | HYSA | CD | TIPS |
|---|---|---|---|---|
| Inflation-adjusted | Yes | No | No | Yes |
| Liquidity | 1yr lockup | Anytime | Term penalty | Anytime (sell) |
| Annual limit | $10k/person | No limit | No limit | No limit |
| State tax | Exempt | Taxable | Taxable | Exempt |
| Default risk | Zero (Treasury) | FDIC to $250k | FDIC to $250k | Zero (Treasury) |
| Phantom income | No (deferred) | No | Yes | Yes (taxable each yr) |
Practical positioning:
- HYSA: emergency fund, short-term cash, anything you might need within 12 months.
- CDs: known cash needs at specific dates 12+ months out.
- I-Bonds: medium-term savings (1-5 years out) where you want inflation protection without market risk. Cap is $10k/year.
- TIPS: larger inflation-protected allocations, typically inside retirement accounts (because TIPS generate phantom income that's taxable each year in taxable accounts).
8. How to Buy Them at TreasuryDirect
I-Bonds are sold exclusively at TreasuryDirect.gov. The process:
- Open a TreasuryDirect account. Requires SSN, US bank account, and a US address. Process takes 10-15 minutes online; setup is famously quirky and old-school.
- Link your bank account. The first time you do this, TreasuryDirect may require a paper-form signature verification through your bank — adds 1-2 weeks for first-time buyers. Plan ahead.
- Buy I-Bonds. Specify the amount ($25 minimum, $10,000 annual maximum), pay from your linked bank account. Bond is issued the next business day at the current composite rate.
- For paper bonds via tax refund: file Form 8888 with your federal return, specifying the amount (up to $5,000) you want delivered as paper I-Bonds. They arrive by mail.
The TreasuryDirect interface looks like a 2003 government website because it largely is one. Don't expect mobile apps, password resets that work on the first try, or modern security. The bonds themselves are excellent; the user experience for buying them is the worst part.
Frequently Asked Questions
What is a Series I Savings Bond?
Series I Savings Bonds (I-Bonds) are inflation-protected savings bonds issued by the U.S. Treasury. They pay a composite interest rate made up of two parts: a fixed rate set at purchase that lasts the bond's 30-year life, and an inflation rate based on the CPI-U that resets every 6 months. The combination means your purchasing power is preserved even during high-inflation periods. They are sold exclusively at TreasuryDirect.gov in $25 to $10,000 amounts (per person, per calendar year).
What is the current I-Bond rate?
The composite rate resets every six months on May 1 and November 1. The Treasury publishes both the new fixed-rate component and the new inflation-rate component on those dates. The composite rate has ranged from below 2% in low-inflation periods to over 9% during the 2022 inflation spike. Check TreasuryDirect.gov for the current rate. Both components compound semi-annually, and existing bond holders see their inflation rate update on every May 1 and November 1 anniversary, while their fixed rate remains locked at the purchase rate.
How is the I-Bond composite rate calculated?
Composite rate = fixed rate + (2 × semiannual inflation rate) + (fixed rate × semiannual inflation rate). For example, with a fixed rate of 1.30% and a semiannual inflation rate of 1.69%: composite = 0.0130 + (2 × 0.0169) + (0.0130 × 0.0169) = 0.0130 + 0.0338 + 0.00022 = 4.70% annualized. The formula prevents your real return from going below the fixed rate even when inflation is high. The composite rate cannot go negative — if deflation occurs, the rate floors at the fixed rate.
How much can I buy in I-Bonds per year?
The annual purchase limit is $10,000 per person per calendar year through TreasuryDirect electronic bonds. You can also buy up to $5,000 in paper I-Bonds with your federal tax refund. Married couples can buy $20,000 between them ($10,000 each), or $25,000 if they each get a $5,000 paper bond from their joint tax refund. You can also buy through trusts and businesses, which is how some investors stack purchases above the personal limit.
Can I sell I-Bonds anytime?
Almost. There is a 1-year lockup — you cannot redeem an I-Bond at all in the first 12 months. Between months 12 and 60 (years 1-5), you can redeem but forfeit the most recent 3 months of interest. After 5 years, you can redeem with no penalty. The bond stops earning interest after 30 years, so the natural exit is somewhere between year 5 and year 30. Tax is owed on accumulated interest at redemption (or when the bond matures), with a federal-only / state-tax-free benefit.
Are I-Bonds taxable?
I-Bond interest is subject to federal income tax but exempt from state and local income tax. You can choose to defer all federal tax until you redeem the bond, or you can elect to report interest annually as it accrues — most investors choose to defer. There is also an education exclusion: if you use I-Bond proceeds for qualified higher-education expenses, the interest may be entirely federal-tax-free, subject to income limits. The state-tax exemption alone is worth 5-13% of interest in high-tax states like California or New York.
I-Bonds vs TIPS — which is better?
Different products. I-Bonds have a $10,000 annual limit, are sold only at TreasuryDirect, must be held 1 year minimum, and pay tax-deferred interest. TIPS (Treasury Inflation-Protected Securities) trade on bond exchanges and brokerages, have no purchase limit, can be sold instantly, and adjust principal upward with inflation (with the principal adjustment taxable each year — "phantom income"). For small inflation hedges in tax-sensitive savings, I-Bonds win. For large allocations or pension/endowment-style portfolios, TIPS win.
Free tool · 30 seconds · No signup
See exactly how much you can put toward I-Bonds this year
Upload a bank statement and we'll calculate the spare cash flow you can route into the $10k annual I-Bond bucket without lifestyle pain.
