Introduction to I Bonds
I bonds are a type of savings bond offered by the U.S. Treasury that are designed to protect investors from inflation. They are a low-risk investment that can provide a competitive interest rate during periods of high inflation. In 2022, the yield on I bonds surged to over 9%, making them a popular investment option for many people. However, as inflation eased, the yield on I bonds decreased to 4.03% as of November 2025.
How I Bonds Work
I bonds are regularly adjusted for inflation, with the rate calculated twice a year based on changes in the nonseasonally adjusted U.S. Consumer Price Index for All Urban Consumers (CPI-U) for all items, including food and energy. When inflation surges, the I bond rate goes up, making it a more powerful investment tool. The main reasons I bond rates rise and fall are:
- I bonds are regularly adjusted for inflation
- The rate is calculated twice a year and based on changes in the nonseasonally adjusted U.S. Consumer Price Index for All Urban Consumers (CPI-U) for all items, including food and energy
- When inflation surges, as it did in 2022, the I bond rate goes up, making it a more powerful investment tool
Advantages of I Bonds
I bonds have several advantages, including:
- Competitive interest rate during inflationary periods: When inflation is high, I bonds can pay more than many other low-risk investments
- Low risk: Because they’re backed by the U.S. Treasury, I bonds offer reliable interest payments and protection of your principal
- Portfolio diversification: Most financial advisors recommend that you balance your portfolio between riskier, more aggressive investments like stocks and less risky investments like government bonds
- Inflation hedge: The bond’s interest will grow at around the same rate as inflation, meaning your savings won’t lose their buying power
- Potential tax break for kids: If you buy I bonds using your child’s Social Security number, the interest is taxed at the child’s rate—often very low or even zero if they have little income
Disadvantages of I Bonds
I bonds also have some disadvantages, including:
- Variable rate: The initial rate is only guaranteed for the first six months of ownership. After that, the rate can fall, down to a fixed-rate component
- One-year lockup: You can’t get your money back at all the first year, so you shouldn’t invest any funds you’ll absolutely need anytime soon
- Early withdrawal penalty: If you withdraw after one year but before five years, you sacrifice the last three months of interest
- Opportunity cost: Having too much of your portfolio in government bonds could mean missing big gains in the stock market
- Annual investment limit: The maximum amount you can invest annually in an I bond is $10,000 per person. Couples can each purchase the full amount
- Interest is taxable: The interest on I bonds is subject to the federal income tax, which varies by income level
- Not allowed in tax-deferred accounts: You can’t buy I bonds inside an Individual Retirement Account (IRA), 401(k) plan, or 529 plan—they must be held in taxable accounts
I Bond Investing Strategies
For many savers, the annual $10,000 maximum investment cap isn’t a problem—that’s a lot of money to have available, after all your expenses are paid and your tax-advantaged retirement savings have been funded for the year. If you’re fortunate enough to have more than $10,000 ready to invest, you’ll have to find other investments whose risk-adjusted return may not be as attractive. I bonds are a helpful hedge, but not a panacea for inflation.
How I Bond Interest Grows
A key feature of I bonds is that their interest compounds automatically. Every six months, the interest you earn is added to the principal balance, so you’re earning interest on an ever-growing pile the longer you keep your money invested. The bond earns interest for 30 years or until you cash it, whichever comes first. However, the variable rate is another risk. If inflation drops back to roughly 2%, as it did from 2010 to 2020, your I bond yield will fall with it.
Conclusion
I bonds are a convenient, relatively safe investment that helps protect savings from the effects of inflation. However, they aren’t the answer to all your inflation problems, and there are risks associated with tying up your money in an investment with cash-out restrictions. It’s essential to weigh the risks along with the benefits before you buy. I bonds can be a valuable addition to a diversified portfolio, but it’s crucial to understand how they work and their potential drawbacks before investing. By considering the advantages and disadvantages of I bonds, you can make an informed decision about whether they are right for you.
