What are Inflation Bonds (i-bonds) by the US treasury?

Updated on: 2022-10-30 - 5 mins read

In our current world, the aftermaths of unprecedented situations like the coronavirus pandemic, the Russia-Ukraine conflict, forest fires, and trade barriers have led to rising inflation rates. Even countries such as the United States and Switzerland, generally immune to such soaring inflation, have succumbed. The US recorded an all-time high inflation rate of 9.1% in May 2022. To protect themselves, people have started to secure themselves financially by investing in low-risk bonds that also give reasonably good profits. One such is the inflation bond (i-bond) by the US treasury. The Department of the Treasury operates and maintains systems critical to the nation's financial infrastructure, such as coin and currency creation, payment disbursement to the American people, revenue collecting, and federal government borrowing.

What is Series I Savings Bonds?

These bonds are safer investment options that the US Treasury issues. I-bonds were introduced to protect the investor's money from losing its value due to the ripple effect of inflation. It is done by adjusting the interest rates based on inflation. A potential investor can purchase I-bonds worth up to $10,000 per year. One can visit the US government's Treasury Direct website for the same. Another noteworthy point is that an investor can buy an additional $5000 worth of I-bond with the tax refund, thereby forming a yearly purchase of I-bonds worth $15,000.

The interest on this bond is evaluated monthly using a "so-called composite rate," based on a fixed interest rate and an inflation-adjusted rate. Though the interest is calculated monthly, the claim is only paid at the end of the tenure or whenever you decide to cash out the bond. And the good is only added to the principal amount twice a year (typically May and November).

Composite Rate=Fixed Rate +{(2 x semi-annual inflation rate) + ( fixed rate x semi-annual inflation rate)}

The fixed rate is the rate you will get when you buy a bond. The set rate is never altered. Every May 1 and November 1, the US Treasury releases the fixed rate. That fixed rate will then apply to any I bonds issued over the next six months. The fixed rate is a yearly charge. At the same time, 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. This rate changes every six months. The Composite rate or the combined rate is the actual interest rate of an I bond. It is a mix of the fixed rate and the inflation rate. Every six months, the total rate can and typically does fluctuate. A bond protects you from inflation because when inflation rises, so does the combined rate.

Although the US Treasury announces new rates in May and November, the date when your bond's rate changes are six months from the date of issue. Use this table to determine when each new rate applies to your I bond.

If your bond is issued on Your interest rate changes
January January 1 and July 1
February February 1 and August 1
March March 1 and September 1
April April 1 and October 1
May May 1 and November 1
June June 1 and December 1
July July 1 and January 1
August August 1 and February 1
September September 1 and March 1
October October 1 and April 1
November November 1 and May 1
December December 1 and June 1

When do they mature?

These bonds mature after 30 years. Usually, they carry a 20-year maturity period, but they can be extended by ten years, totalling a tenure of 30 years.

The noteworthy point is that one must hold the bond for at least five years to receive all the interest. Cashing out within a year will not give you any claim. However, if you cash out after one year but before the completion of 5 years, you will have to forfeit the last three months' interest.

Are I-bonds exempt from Tax?

Usually, I-bonds are exempted from state and municipal tax. However, they are subject to federal income tax. That being said, if the I-bond funds are used to pay for higher education, then the bonds are exempted from all kinds of taxation.

The taxes have to be paid once you've cashed out the bond. The noteworthy point is that the bond owner has to pay the Tax irrespective of who purchased the bonds.

How to purchase these bonds?

You must go to the US government's Treasury Direct website to purchase these bonds. The bonds can be purchased electronically. They can also be bought using the proceeds from tax returns. These bonds cannot be sold elsewhere. You can cash them out directly with the U S Government.

You can follow the steps mentioned below to buy an I bond. Before we get into that, here are some of the documents you require to open an account on the US Treasury’s website:

  • Social Security Number or a Taxpayer Identification Number
  • A United States address record
  • Bank account (Checking or Savings)
  • Mail address and
  • Stable internet connection

Once you’ve mustered all this, you can open an account. For that

  • Head to their application portal, and click “Individual account.”
  • Next, enter your details.
  • Choose your password and security questions.
  • Click Submit, and you will have opened a Treasury Direct account
  • Next, log in to your account
  • Select Buy Direct
  • Select “Bonds” under Marketable securities
  • Click Next and enter the required details, such as purchase amount, fund source, and interest payment destination
  • Review your purchase and click submit
  • You would have gotten yourself a Series I bond

What are the benefits?

Some of the noticeable benefits of these bonds include :

  • Protection of money against inflation
  • Exemption from state and local tax
  • Financial security
  • Zero Risk

What is a good time to buy i-bonds?

Buying an I-bond in the month of October 2022 gets an initial rate of 9.62% as opposed to 4.29%. If you’re looking to buy an I-bond soon, now is probably the right time.

So, to conclude, Inflation bonds or I-bonds are one of the safest investment tools the US has at its disposal that gives high returns at zero risk. The I-bond is a great way to save and invest for your and your family's future.