Series I Savings Bond

A Series I savings bond is a non-marketable savings bond issued by the US Treasury and bought through TreasuryDirect. Its earnings rate, which Treasury calls the composite or combined rate, is built from a fixed rate that never changes for that particular bond and an inflation rate that Treasury resets twice a year. The bond earns interest for up to 30 years, interest is credited monthly and compounded semiannually, and the earnings are not paid out along the way: the holder receives everything on redemption or at final maturity.

Because it is not marketable, it has no price and cannot be sold to another investor, which is the source of both its main protection and its main restriction. Its nominal value cannot fall, so there is no market loss to suffer, and there is also no way to convert it to cash except by redeeming it with Treasury on Treasury's terms. A Series I bond therefore does not belong in the same sentence as cash instruments that lose ground to inflation. Those instruments pay a rate set independently of prices, while the whole design of this one is to move with the index.

Treasury states the composite rate formula as fixed rate, plus two times the semiannual inflation rate, plus the fixed rate multiplied by the semiannual inflation rate. The doubling is what annualizes a six-month figure, and the final term is a small cross-product that a page describing the rate as "the fixed rate plus inflation" will miss. The difference is a couple of hundredths of a percentage point rather than anything dramatic, but it means an arithmetic check against Treasury's published number will not reconcile.

The two halves behave differently over time, and the distinction is the main planning fact on this page. Treasury announces the fixed rate every May 1 and November 1, and says that rate "then applies, for the life of the bond, to all I bonds that we issue during the next 6 months." So the fixed rate is a permanent property of the bond determined by when it was bought, which is why two bonds bought six months apart can behave differently for decades. The inflation component, by contrast, is reset for every outstanding bond twice a year, and it is based on the non-seasonally adjusted Consumer Price Index for all urban consumers, all items, including food and energy. That is the headline index rather than a core measure that strips out food and energy, which contradicts any description of I bonds as tracking core inflation.

The timing point is the one nearly every summary gets wrong. Treasury announces rates in May and November, but in its own words, "although we announce the new rates in May and November, the date when the rate changes for your bond is every 6 months from the issue date of your bond." A bond issued in September changes rate on March 1 and September 1, and carries whatever composite rate was in force at issue until the following March. So a holder planning a redemption around a rate change has to work from their own issue month, not from the announcement calendar, and ten of the twelve purchase months put the change somewhere other than May or November.

What the fixed rate guarantees is narrower than it looks. Treasury says deflation "can bring the combined rate down below the fixed rate (as long as the fixed rate itself is not zero)," and that if a negative inflation rate would push the combined rate below zero, "we stop at zero." So a fixed rate is not a floor on the earnings rate. What is genuinely guaranteed is that the bond's redemption value never falls, because a zero composite rate means the bond simply stops earning rather than losing value.

Series I bonds are frequently compared to Treasury Inflation-Protected Securities, and the difference is structural. TIPS adjust their principal with the index and are marketable, so they can be sold on any business day and their market price can fall before maturity. An I bond adjusts its rate rather than its principal, is not marketable, and cannot lose nominal value. One trades price risk for liquidity; the other trades liquidity for the absence of price risk.

Buying happens at TreasuryDirect.gov, in any amount from $25 upward to the penny, and Treasury credits interest from the first day of the month of purchase, so a bond bought on the last day of a month earns that whole month. The purchase limit is $10,000 per calendar year for each Social Security number or Employer Identification Number, and for individual accounts the limit attaches to the Social Security number of the first-named holder in the registration. A married couple therefore has two separate limits, and an entity with its own EIN has one of its own. Since January 1, 2025 the bonds are available only electronically, which ends the route that let a taxpayer buy additional paper bonds with a refund, so any source describing a combined annual limit above $10,000 is out of date.

Redemption has two separate restrictions that are often collapsed into one. A bond cannot be redeemed at all for 12 months. Between 12 months and five years it can be redeemed, but the last three months of interest are forfeited. Treasury's own illustration is that if the bond is cashed after 18 months, the holder receives the first 15 months of interest. After five years there is no penalty. The 12-month lock is the reason an I bond does not work as an emergency fund, whatever the rate looks like, and it is the boundary with a high-yield savings account or a short certificate of deposit.

One display detail prevents a support call. For bonds less than five years old, the value shown in TreasuryDirect and in the savings bond calculator excludes the last three months of interest, because that interest would be forfeited on an early redemption. The figure on screen is deliberately conservative for the first five years rather than wrong.

A hypothetical illustration of the composite formula, using invented rates rather than any current ones. Suppose a bond carries a fixed rate of 1.20% and Treasury sets the semiannual inflation rate at 1.40%. The formula gives 0.0120 plus two times 0.0140, which is 0.0280, plus 0.0120 multiplied by 0.0140, which is 0.000168. Adding the three parts gives 0.040168, which Treasury rounds and publishes as a composite rate of 4.02%. Adding the fixed rate to the annualized inflation rate on its own would have given 4.00%, so the cross-product is worth about two hundredths of a percentage point here. The current fixed and composite rates change every six months and are published at TreasuryDirect.gov, which is where they should be read rather than from any page that states them.

Pros

• The inflation component is designed to track the index, so the bond is not the kind of cash holding that loses purchasing power when prices rise.
• Nominal value cannot fall. The composite rate stops at zero rather than going negative, and there is no market price to decline.
• Interest is exempt from state and local income tax, and federal tax can be deferred until redemption or final maturity.
• Interest compounds semiannually inside the bond with no reinvestment decision, and no tax is due along the way if deferral is chosen.
• Interest may be excluded from income entirely when used for qualifying higher education expenses, if the strict ownership conditions are met.

Cons

• Completely illiquid for the first 12 months, which rules it out for money that might be needed sooner.
• Redeeming before five years forfeits the last three months of interest.
• The annual purchase limit caps how much of a portfolio can be held this way, and it cannot be caught up in a later year.
• The fixed rate is set by the month of purchase and cannot be improved later, so two otherwise identical holdings can differ for decades.
• Deferring tax until redemption concentrates years of interest into a single tax year, which can matter for income-tested figures in that year.
• Held only through a TreasuryDirect account, and paper bonds are no longer issued at all.