There are U.S. Government Savings Bonds, called “I Bonds,” that are currently paying a 4.26% annualized interest rate as of September 2026. You can continue to buy the bonds at that initial interest rate through October 31, 2026, and then a new rate will be announced on November 1, 2026. Before you buy these bonds, you should know the 4.26% interest rate is only for the first 6 months that you own bonds purchased during this period and there are restrictions as to when you can redeem the bonds. In this article I will cover:
How do I Bonds work?
Are they safe investments?
Purchase limits
Why does the interest rate vary over the life of the bond?
How do you purchase an I Bond?
Redemption restrictions
Tax considerations
How do I Bonds Work?
I Bonds are issued directly from the U.S. Treasury. These bonds earn interest monthly and the interest compounds every six months, but the interest is not paid to the bondholder until the bond is either redeemed or when the bond matures, which is 30 years from the issue date.
Variable Interest Rate
Unlike a bank CD that may pay the same interest rate until it matures, an I Bond has a variable composite interest rate that changes every 6 months based in part on the rate of inflation. There are two components that make up the I Bond’s interest rate:
The Fixed Rate
The Inflation Rate
The fixed rate, as the name suggests, stays the same over the 30-year life of the bond. The fixed rate on I Bonds being issued from May 1, 2026 through October 31, 2026 is 0.90%.
The inflation rate portion of the bond interest usually varies every 6 months. A new inflation rate is set by the Treasury in May and in November. The inflation rate is based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.
You can find the rates that the bonds are currently paying via TreasuryDirect's I Bond Rates page.
The total initial interest rate is determined using both the fixed rate and the inflation rate and is currently 4.26%. But that initial interest rate only lasts for the first 6 months that you own the bond. After the first 6 months, the new inflation rate is used along with your bond's fixed rate to determine what interest rate your bond will pay for the next 6 months.
Your 6-month cycle is based on when you purchased your bond.
For example, if you purchase an I Bond in September 2026 at the current annualized rate of 4.26%, that rate will apply to the bond for its first 6 months. Then, in March 2027, your bond will begin using the inflation rate announced in November 2026, combined with your bond's 0.90% fixed rate, to determine the rate for the next 6 months. This pattern continues until you redeem the bond or it reaches its 30-year maturity.
Was The Fixed Rate Ever Higher Than 0%?
Yes. In fact, the fixed rate has been above 0% for several years. The fixed rate was 1.30% for I Bonds issued from November 2023 through October 2024, 1.20% for bonds issued from November 2024 through April 2025, and 1.10% for bonds issued from May through October 2025.
The current fixed rate for I Bonds issued from May through October 2026 is 0.90%.
Remember, the fixed rate in effect when you purchase the bond remains attached to that bond for its entire 30-year life.
Can These Bonds Lose Value?
To keep my compliance department happy, according to the U.S. Treasury, the composite interest rate on an I Bond will not fall below 0%, even during periods of deflation.
These bonds are generally viewed as very safe investments because they are backed by the U.S. government.
Purchase Restrictions: $10,000 Per Year
There are purchase restrictions on these bonds but they are not income based. Individuals are generally limited to purchasing $10,000 of electronic I Bonds each calendar year per Social Security number.
In prior years, taxpayers who were due a federal income tax refund could purchase up to an additional $5,000 of paper I Bonds using their refund. However, the Treasury discontinued that program effective January 1, 2025.
As a result, the standard annual purchase limit for an individual is now $10,000 of electronic I Bonds.
If you're married, you can purchase $10,000 for your spouse and $10,000 for yourself.
Self Employed Individuals
If you are self employed and your company is an eligible entity with its own TreasuryDirect account, the company may be eligible to purchase up to $10,000 of I Bonds each calendar year.
Trusts Can Purchase I Bonds
If you have an eligible trust with a TreasuryDirect entity account, your trust may also be eligible to purchase up to $10,000 worth of I Bonds each year.
Gift An I Bond
You can buy an electronic I Bond as a gift for someone else. This is common when parents purchase bonds for their children or grandparents purchase bonds for their grandchildren.
Keep in mind that gift bonds count toward the recipient's annual purchase limit when the gift is delivered to the recipient.
$80,000 Worth of I Bonds In A Single Year
Let’s look at an extreme hypothetical example of how a family could potentially purchase $80,000 of I Bonds in a single year. You have a family that is comprised of two parents and three children, one of the parents owns an accounting firm set up as an S-Corp, and the parents each have an eligible trust.
Parent 1: $10,000
Parent 2: $10,000
Child 1: $10,000
Child 2: $10,000
Child 3: $10,000
S-Corp: $10,000
Parent 1 Trust: $10,000
Parent 2 Trust: $10,000
Total: $80,000
The $80,000 is just for one calendar year. If this structure stays the same and each individual or entity remains eligible, they could potentially continue purchasing I Bonds each year up to the applicable annual purchase limits.
At the current 4.26% annualized rate for newly issued I Bonds, investors may still find I Bonds attractive as a government-backed savings option.
Restrictions on Selling Your I Bonds
You are not allowed to redeem your I Bond within 12 months of the issue date. If you decide to redeem your bond after 1 year but before 5 years, you will lose the last three months of interest earned by the bond.
Once you are past the 5-year holding period, there is no interest penalty for redeeming the bond.
When Do You Pay Tax On The I Bond Interest?
The interest that you earn on I Bonds is subject to federal income tax but not state or local income tax. You generally have a choice as to when you want to report the interest for federal income tax purposes.
You can either report the interest each year as it accumulates within the bond or defer reporting the interest until you redeem the bond or it reaches final maturity.
Warning: If you elect to report the interest each year for tax purposes, you generally must continue to use that method for your savings bonds unless the IRS permits you to change your accounting method.
Under certain circumstances, taxpayers may also be able to exclude some or all of the interest from federal income tax when eligible savings bond proceeds are used for qualified higher education expenses. Income limits and other requirements apply.
How Do You Purchase An I Bond?
I Bonds are issued electronically through the TreasuryDirect website. You have to establish an online TreasuryDirect account and purchase the bonds within your account.
As of January 1, 2025, paper I Bonds are no longer available for purchase through federal income tax refunds. New I Bond purchases are now made electronically through TreasuryDirect.
I Bond Minimum Purchase Amount
The minimum purchase amount for an electronic I Bond is $25. Over that threshold, you can purchase any amount you want to the penny, up to your annual purchase limit.
If you wanted to, you could purchase an I Bond for $81.53.
How Do You Redeem Your I Bonds?
If you own the bonds electronically, you can redeem eligible bonds through your TreasuryDirect account after the required 12-month holding period.
If you own older paper I Bonds, you can ask your local bank or financial institution if they cash savings bonds. If they don't, TreasuryDirect provides instructions and forms for redeeming paper savings bonds directly through the U.S. Treasury.
What Are Your Savings Bonds Worth?
If you want to know how much your savings bonds are worth before cashing them in, for electronic bonds you can log into your TreasuryDirect account to see the value.
If you have existing paper bonds, you can use the Savings Bond Calculator provided by TreasuryDirect.
One thing to keep in mind: for I Bonds that are less than 5 years old, the value displayed by TreasuryDirect generally reflects the three-month early redemption interest penalty.
DISCLOSURE: This article is for educational purposes only and is not a recommendation to buy I Bonds. Please consult your financial professional for investment advice.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What are I Bonds and how do they work?
I Bonds are U.S. government savings bonds that earn interest based on both a fixed rate and an inflation-adjusted rate. Interest compounds every six months and is added to the bond’s value, but it isn’t paid out until you redeem the bond or it matures after 30 years.
Are I Bonds a safe investment?
Yes. I Bonds are backed by the U.S. Treasury and cannot lose value. Their interest rate can never fall below zero, and their redemption value is guaranteed to increase over time regardless of inflation changes.
Why does the I Bond interest rate change?
The interest rate on I Bonds combines a fixed rate (set at purchase) and a variable inflation rate that adjusts every six months based on the Consumer Price Index (CPI-U). As inflation rises or falls, the overall rate on the bond adjusts accordingly.
How much can you invest in I Bonds each year?
Individuals can purchase up to $10,000 per year in electronic I Bonds through TreasuryDirect. An additional $5,000 in paper I Bonds can be purchased using a federal tax refund, allowing for a potential total of $15,000 per person annually. Entities such as businesses and trusts with their own tax IDs can also purchase up to $10,000 per year.
What are the redemption restrictions for I Bonds?
I Bonds cannot be redeemed within the first 12 months of purchase. If redeemed within the first five years, you forfeit the last three months of interest. After five years, they can be cashed in at any time with no penalty.
How are I Bonds taxed?
Interest from I Bonds is subject to federal income tax but exempt from state and local taxes. You can choose to report interest each year as it accrues or defer taxes until you redeem the bonds, transfer ownership, or they mature.
How do you buy and redeem I Bonds?
I Bonds are purchased electronically through the TreasuryDirect website, with a minimum purchase of $25. To redeem electronic bonds, you log in to TreasuryDirect and request a redemption. Paper bonds, if owned, can be cashed at some banks or mailed to the Treasury with Form 1522.
