I Bonds and Whether They Still Beat a Savings Account

I bonds sound like the perfect home for cash: backed by the US government, protected against inflation, and free from state income tax. But they also lock your money up for a year, cap how much you can buy, and pay a rate that can drop sharply every six months, which leaves a lot of savers unsure whether they are worth the hassle.

I have helped plenty of readers and friends decide where their savings should sit, and the honest answer is that I bonds suit a narrow set of goals very well and most other goals poorly. Here is how they work, how the rate is calculated, and how to tell whether yours is a good fit.

How I bonds work

An I bond is a US savings bond sold directly by the Treasury through its TreasuryDirect website. You buy it at face value, from as little as 25 dollars, and it earns interest that is added to the bond's value every six months. You do not receive interest payments along the way; you collect everything when you cash the bond in.

The key rules are short but strict:

Purchase limit: 10,000 dollars per person per calendar year in electronic bonds. A married couple can buy 20,000 dollars between them.
Minimum holding period: you cannot cash an I bond for the first 12 months, for any reason.
Early cash-out penalty: if you redeem before five years, you lose the last three months of interest.
Maximum life: an I bond earns interest for 30 years, then stops.
Taxes: interest is subject to federal income tax but exempt from state and local income tax. You can defer the federal tax until you cash the bond.

How the I bond rate is calculated

The I bond rate has two parts, and understanding them explains almost every surprise savers run into.

The fixed rate is set when you buy the bond and stays with it for all 30 years. The inflation rate is based on changes in the consumer price index and is reset every May 1 and November 1. The two combine into a composite rate using a Treasury formula that roughly equals the fixed rate plus twice the six month inflation figure.

Here is a simple example with round numbers. Say a bond carries a 1.0 percent fixed rate, and the six month inflation figure is 1.4 percent. The composite rate works out to about 3.8 percent a year for the next six months. If inflation cools and the six month figure drops to 0.8 percent, the composite rate falls to about 2.6 percent, while the 1.0 percent fixed part stays put.

That fixed rate is the part that matters for long term holders. In 2021 and early 2022, I bonds paid more than 7 and 9 percent because of high inflation, but the fixed rate on those bonds was 0 percent. Once inflation cooled, they earned far less than people expected. Always check the current fixed rate, announced every May and November, before you buy.

I bonds vs a high-yield savings account

For most people, the real comparison is with an online savings account. Here is how they stack up on the points that tend to decide it:

Feature	I bonds	High-yield savings
Access to cash	Locked for 12 months	Same or next day
Rate changes	Every six months	Any time the bank chooses
Inflation protection	Built in	None
State income tax	Exempt	Taxed
Annual limit	10,000 dollars per person	No practical limit
Federal insurance	Backed by the US Treasury	FDIC up to 250,000 dollars per bank

If a savings account pays 3.75 percent and the I bond composite rate is 3.8 percent, the two are roughly even before tax. The state tax exemption tilts it toward I bonds in high tax states like California or New York. The lock-up and penalty tilt it back toward the savings account for anyone who might need the money soon. Our review of whether high-yield savings accounts are worth the switch covers how to compare those account rates.

The counter-take on using I bonds as an emergency fund

You will often read that I bonds make a great emergency fund once you get past the first year. I disagree for most households.

An emergency fund has one job: to be there, in full, the day the car breaks down or a paycheck stops. I bonds fail that test in three ways. The first 12 months are completely locked. After that, cashing out still costs three months of interest until year five. And redeeming through TreasuryDirect takes a few business days to reach your bank, which is slower than a transfer from a savings account.

A more practical setup is to keep at least three months of essential expenses in a high-yield savings account, then use I bonds as a second layer for money you are fairly sure you will not need for a year or more. If you have not built that first layer yet, start with our guide on how much should go into your emergency fund first.

Who I bonds actually suit

I bonds make the most sense for:

Savers with a goal three to ten years away, such as a house deposit or a future car, who want protection against inflation without stock market swings.
People in high tax states who value the state tax exemption.
Retirees who want a slice of their cash safe from inflation and can spread purchases over several years.
Parents saving for education, since interest can be tax free when used for qualified college costs, subject to income limits.

They make less sense if you need the money within a year, if you want more than 10,000 dollars invested quickly, or if the fixed rate is close to zero and you plan to hold for decades.

How to buy I bonds step by step

Open an account on TreasuryDirect with your Social Security number, a US address and a checking account.
Choose "BuyDirect", select Series I, and enter the amount, in any amount from 25 dollars upward to the cent.
Pick a purchase date. Buying near the end of a month still credits interest for the whole month, so a late month purchase starts earning sooner.
Note the fixed rate and purchase date in your own records, since you will need them when deciding which bonds to cash first.

Frequently asked questions

Are I bonds a good investment right now?

It depends on the current fixed rate and your timeline. If the fixed rate is around 1 percent or higher and you can leave the money for at least five years, I bonds are a solid inflation protected choice. If you need flexibility, a high-yield savings account usually wins.

Can you lose money on I bonds?

No. The composite rate cannot fall below zero, so the bond's value never goes down. The only loss is the last three months of interest if you cash out before five years.

When should you cash in I bonds?

Consider cashing out when the bond has passed five years and its composite rate drops below what a savings account or Treasury bill pays. Bonds with a higher fixed rate are generally worth keeping longer, so cash the lowest fixed rate bonds first.