What are I Bonds?

What are I Bonds? I Bonds are U.S. savings bonds issued by the U.S. Treasury. As such they are backed by the full faith and credit of the U.S government. They have virtually zero default risk and thus considered risk free bonds. If you are curious the I in I Bond stands for Inflation.

The return, or yield, of an I Bond comes in two parts. The first of which is a fixed rate of return that is in effect when you first purchase the bond. This yield will stay the same for the life of the bond. The second part of the yield is the inflation adjusted yield. The inflation adjusted yield will of course change with inflation. The actual inflation yield is calculated twice annually, once in May and November.

I Bonds can be purchased by anyone in the US that is over 18 years old, and possess a valid social security number. They can be purchased online directly from the U.S Treasury website in increments as low as $25. The maximum amount which can be purchased, by any given individual in a year, is $30,000.

I Bonds can be redeemed at anytime after a 1 year holding period. However, if you decide to redeem your bond before a 5 year holding period you will lose 3 months of interest. One golden nugget is that I Bonds are tax free until redemption. Even when purchased with after tax money an I Bond is essentially tax free for up to 30 years. When dealing in taxable accounts this can be a great benefit for your portfolio

Upon redemption you will have to pay taxes on both parts of the yield. If you are in a high tax bracket when you redeem the bonds, and inflation has been high you may actually lose purchasing power. This is true because you are paying taxes on the inflation yield of the bond and the regular yield. If the tax you have to pay on both yields is greater than the fixed yield of the bond then you will lose purchasing power.

Hopefully you know have an idea what I Bonds are and can answer the question, “What are I Bonds?”