What Are Series I Bonds? Rates, Risks, Taxes Explained

Series I bonds, issued by the U.S. Treasury, offer a unique combination of safety and inflation protection, making them an attractive investment option, particularly during periods of rising prices. Here's a detailed analysis of their features and benefits: 1. **Inflation-Adjusted Interest**: Series I bonds have a fixed rate and an inflation rate that adjusts every 6 months based on changes in the Consumer Price Index (CPI). This means that if inflation rises, the interest rate on the bond increases, helping to protect the purchasing power of your investment. 2. **Low Risk**: As they are backed by the U.S. government, Series I bonds are considered low-risk investments. The principal amount is secure, and the interest is exempt from state and local taxes, offering tax benefits. 3. **Long-Term Investment**: These bonds are issued at face value and have a final maturity of 30 years, with an initial 20-year original maturity period followed by a 10-year extended maturity period. 4. **Interest Compounding**: Interest is added to the bond's value monthly, and the new principal value is calculated every 6 months based on the previous interest earned. This compounding effect can lead to higher returns over time. 5. **Liquidity Considerations**: While Series I bonds can be cashed in after 12 months, doing so before 5 years results in the loss of the last 3 months of interest. This lockup period may not be suitable for investors needing liquidity in the short term. 6. **Current Interest Rate**: The current interest rate for Series I bonds is 3.98% for the period from May 2025 to October 2025, which includes a fixed rate of 1.10% and an inflation rate that adjusts every 6 months. 7. **Tax Implications**: Interest from Series I bonds is subject to federal income tax and can also be subject to estate, gift, and inheritance taxes. However, using the proceeds from I bonds for qualified higher education expenses can result in tax-free interest. In conclusion, Series I bonds are a solid choice for investors seeking a low-risk, inflation-protected investment with a relatively high yield. They are best suited for long-term investment strategies where the investor is willing to hold the bond until maturity to avoid early withdrawal penalties and to benefit from the inflation-adjusted interest rates.