I Bond Rates in 2023 and How Good Are They Really?

The housing market has long been one of the better investments to combat inflation. But with mortgage interest rates rising, many are looking for alternative ways to protect their hard-earned money.

What other ways can you protect your money from losing its value? Short answer: I bonds. 

I bonds were introduced as a mechanism to help investors combat high inflation rates using a composite interest rate that takes inflation into account. 

Another great thing about I bonds? They are securities issued by the U.S. Treasury and are considered low-risk investments.

Keep reading if you’re curious if I bonds are an ideal investment for you.

In this post, we’ll go over everything you need to know about I bonds and how you can use them to combat high inflation rates. 

Afterward, you can learn more about how to buy I Bonds!

What Are I Bond Rates in 2023?

Currently, the treasury offers a guaranteed, annualized interest rate of 4.30% for new I bonds purchased between May and November of 2023. 

What Are I Bonds?

I bonds, a.k.a I savings bonds,  are a type of savings bond issued by the United States Federal Government. 

There are two types of savings bonds: EE savings bonds and I savings bonds. 

I bonds are designed to protect you from inflation. They do this by accumulating a composite interest rate based on two different interest rates: 

• Fixed interest rate that acts as the base level
• Inflation rate calculated semi-annually (November & May) using the CPI-U

For example, an I bond issue may have a total interest rate of 4%, with 2% of this rate being based on a fixed interest rate and 2% being based on a variable rate based on the level of inflation in the economy as measured by the CPI-U. 

That said, this adjustment is not perfect and can be a double-edged sword. If, for instance, inflation is calculated to be low or negative (deflation), total I bond accrued interest may be less than other comparable non-inflation-adjusted bonds. 

It is important to note that I bonds interest rates are guaranteed to never fall below zero, so your I bond will never lose value. This is particularly important when the economy is experiencing deflation (negative inflation rate). 

It is also worth noting that I Bond payments are not paid in cash (a.k.a coupons); rather, they are accrued to the principal of the bond.

What Are the Benefits of I Bonds?

1. Credit Risk-Free

One of the main benefits of I bonds is that they are considered to be credit risk-free. This rating means the bond is guaranteed or absolutely certain to pay interest and principal. 

The main reason is that I bonds are securities issued by the U.S. Treasury and are backed by the United States Federal government. 

As with most securities issued by the United States, the likelihood of default is highly unlikely since the Federal Government can print more money to service any obligations. 

2. Inflation Protection

Inflation protection is one of the unique features offered by I bonds. Most savings bonds, such as the EE savings bonds, only offer a fixed interest rate. I bonds, on the other hand, offer a composite interest rate. 

The composite interest rate is comprised of two interest rates:

• Fixed interest rate
• Variable Inflation rate calculated semi annually (November & May) using the CPI-U

This feature of the I bonds allows you to hedge against inflation. It makes them great securities during times of high inflation or when inflation is expected to continue to rise over the foreseeable future. 

3. Tax Advantaged

I bonds also offer a tax advantage that most other securities don’t offer. I bond holders don’t pay any state or local income tax on the interest earned by I bonds, and federal taxes can be deferred until the investor redeems the bond or it ultimately matures. Even if you make millions of dollars, tax advantages can significantly impact retirement savings.

Additionally, if the investor uses the bond proceeds for qualified higher education expenses at an eligible institution for yourself or a dependent in the same year you redeem them, you may be able to exclude some or all of the interest from federal income tax.

Some mechanisms are also tax-deferred, like the backdoor Roth. 

4. Accessible

Another major benefit of I bond is that almost anyone can easily purchase them. You can purchase I bonds electronically or on paper, depending on your preferences. 

When purchased electronically, you can check the value of your I bond online at the U.S. Treasury website. 

You can buy electronic I bonds through your TreasuryDirect account online at www.treasurydirect.gov. You will need a valid bank account and social security number or Employer Identification Number (EIN) to purchase your I bonds. 

Another excellent feature is that you can set up automatic purchases through payroll deduction or direct deposit. 

Alternatively, should you wish to purchase paper I bonds, you can do so with your IRS tax refund by filing Form 8888 with your tax return. Of course, you will need to indicate how much of your refund you want to use to buy I bonds and provide a valid Social Security Number and mailing address.

5. Flexible

They are also very flexible when it comes to purchasing amounts, with a minimum purchase requirement of $25 for electronic bonds and $50 for paper bonds. In the electronic form, you can also buy any amount above the minimum noted above to the penny, such as $50.01. 

Moreover, I bonds offer great redemption flexibility. You can redeem your I bonds after 12 months, but if you do so within five years of your purchase, you will forfeit the last three months of interest. 

You can hold your I bond for up to 30 years, during which time it will continue to earn and pay interest. 

What Are the Drawbacks of I Bonds?

1. Low Return Potential

Ultimately, I bonds are credit-risk-free investment vehicles. Given that the financial markets are generally assumed to compensate investors with a return profile commensurate with their risk profile, I bonds will not be a home run in terms of growing purchasing power over time as the stock market might be. 

However, if your goal is to find a “risk-free” instrument that prevents purchasing power erosion from the effects of inflation with a very modest “real” (inflation-adjusted) return, then I bonds are an excellent choice.

2. Inflation Adjustment Can Be Negative

Although a bond’s composite payout can never be negative, the inflation component could be negative in a deflationary environment.

3. Not Liquid/Marketable

You cannot sell or transfer your I bond to another person or entity, except in some cases of death or divorce. Also, you cannot redeem your I bond before 12 months, and, as noted previously, if you do so within five years, you will lose some interest.

All of this combined effectively lowers the liquidity of I bonds and limits your ability to access your money quickly or easily if you need it for an emergency or an investment opportunity.

4. Annual Purchase Limit

You can only buy up to $10,000 worth of electronic I bonds and up to $5,000 worth of paper I bonds per calendar year, per Social Security Number or Employer Identification Number (EIN). This means you cannot invest more than $15,000 per year in I bonds in total, which may not be enough to meet your savings goals. 

Who and When Should You Consider I Bonds?

Safe Investment 

I bonds are a great investment for people looking for a safe investment that offers protection against inflation. As with other safe investments, the return on I bonds will never lose value. I bonds are guaranteed to remain at zero interest rate or greater, which ensures that you will at least receive your principle. 

In addition, since these I savings bonds are securities offered by the Federal Government, they are rated as credit risk-free, making them extremely unlikely to default. 

Increase Inflation-Indexed Portfolio Allocation

Another reason to consider I bonds is to increase the inflation-indexed allocation in your portfolio. Since I bonds offer protection against inflation, they are a great way to hedge against losing the purchasing power of your dollar.

While the interest rate you receive compared to other investment instruments is not likely to be much better, they ensure that your investment does not lose value due to rising inflation. 

I bonds were less valuable in previous years due to very low inflation rates; in 2022 and 2023, with the rising inflation rates, they are highly valuable. 

Conclusion

I bonds are a type of savings bond that offers inflation protection, low risk, tax advantages, flexibility, and accessibility. However, these benefits need to be evaluated against the drawbacks of low total return profiles, limited liquidity, and limited annual purchase sizes for individuals.

FAQ’s 

Can You Lose Money on I Bonds?

No, you can’t lose money on an I bond because it can’t go lower than its original value. Although I bonds are partially pegged to the inflation rate, the interest rate is guaranteed to stay at or above zero. Even with high deflation, your I bonds will not lose value. 

How Long Do You Have To Hold an I Bond?

Bonds are quite flexible in the amount of time they need to be held. The minimum time you have to hold an I bond is 12 months. It’s important to note that a penalty of the last three months’ interest is applied to any I bonds redeemed within five years. 

For example, if you redeem your I bond after 20 months, you will only receive 17 months of interest, plus the principle. On the other hand, if you redeem your I bond after 65 months, you will receive all 65 months of interest, plus the principle. 

How To Buy Bonds?

You can either buy electronic or paper form I bonds. There are two ways you can buy electronic I bonds. Check out a thorough guide from our friends at physicianonfire.com.

The easiest way to electronic I bonds is by visiting TreasuryDirect.gov, the official United States government source for purchasing I bonds. The second way to purchase I bonds is through the Payroll Savings Plan. This would allow your employer to send a portion of your payroll to purchase I bonds. 

As of 2023, there is only one way to purchase paper I bonds: your IRS Tax Refund. You can allocate a portion of your IRS Tax Refund to I bonds, which will be given to you as paper I bonds. There are no other ways to purchase paper I bonds.  

Are I Bonds a Good Investment in 2023?

Yes, I bonds are a safe investment, especially in 2023, when we see rising inflation rates. I bonds offer protection against inflation by factoring it into the interest rate that it accumulates. 

Another reason they are a good investment is that they are easily accessible with low minimum purchase amounts allowing almost anyone to purchase them. 

In addition, they are safe because they will not lose value and offer some tax-deferment features.