What are I Bonds?
I Series Bonds, commonly known as “I Bonds”, are a quite different than your grandma’s traditional savings bond (Which is an EE Series savings bond). I bonds earn interest in 2 separate ways; a fixed interest rate that remains constant for the life of the bond along with a variable rate that changes every 6 months based on inflation.
An I bond has 2 components:
A Fixed Rate – This stays the same for the life of the bond and is known at the time of purchase.
A Variable (Inflation) Rate – This changed every 6 months and is based on the government’s inflation numbers.
For example, at the time I write this I bonds purchased today have an interest rate of 1.18%. How does the Treasury come up with 1.18%?
Like EE savings bonds bonds, I bonds are purchased at face value (a $50 bond costs $50) and earn interest for 30 years. I bonds cannot be sold for 1 year after purchase and if sold before 5 years of purchase you give up the most recent 3 months of interest as a penalty.
Unlike EE savings bonds, I bonds can be purchased in paper format ONLY in $50 denominations as your tax refund. They can also be purchased online at treasury direct in any amount to the penny as long as it is above $25.
I bonds have the same tax rules as EE bonds. You do have to pay federal taxes on the interest you earn, but you are not required to pay state or local taxes on any interest earned. However, if the bonds are used for “Qualified education expenses” you do not have to pay tax on the interest. But be sure to read all the fine print on that benefit here: http://www.treasurydirect.gov/indiv/planning/plan_education.htm
You are also allowed $10,000 in electronic I bonds per year, along with $5,000 in paper form.
You can learn more about I bonds on Treasury Direct’s website on I bonds here: http://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm