I bonds are a type of US Treasury savings bond that earns interest based on a combined fixed interest rate and an inflation rate. This combination means your savings are protected from inflation over time, and creates a very low-risk investment option for the long run.
The current inflation rate for I bonds is 7.12%. This inflation rate is updated every 6 months, on November 1st and May 1st of each year, so the current rate is valid through April 2022. I bonds also earn interest monthly that is added to the value of the bond twice a year, positioning your money to compound over time because the principal amount earning interest is continuing to grow. The fixed interest rate is 0.00%.
I bonds are exempt from state and local income taxes, although they are not exempt from federal income taxes. That being said, if the bond is used to pay for higher education expenses at a qualifying institution, it may be entirely tax free, and would be a good option for parents as an alternative or in addition to a 529 plan.
Annual I bond purchases are limited to $10,000, and can be purchased online through the US Treasury Department. However, there is the option to purchase up to $5,000 more in a paper bond when you mail in your federal tax return. Overall, this allows you to purchase up to $15,000 of I bonds per year.
I bonds are a great long term investment option because they have a 30-year maturity period, and continue to accrue interest for 30 years. However, that does not mean you have to hold them for 30 years, you can redeem your I bond after one year. If you redeem your bond after one year and before 5 years, there is a small penalty of 3 months’ interest. After 5 years, there is no penalty to redeem your I bond.
Where to purchase an I bond:
You can purchase an I bond through TreasuryDirect, after making an account or logging into an existing account. Here is a link to the TreasuryDirect log-in page:
Unfortunately, at this time TD Ameritrade cannot hold I bonds as they are a “bank product” and need to be purchased separately. We still encourage you to look into these bonds as an option, and would love to discuss the benefits of them on an individual basis!