Are I bonds a safe investment? (2024)

Key points

I bonds are low-risk investments that can provide a guaranteed return and protect against inflation.
I bonds have a fixed rate and an inflation-adjusted rate that combine to create the composite rate of return.
During times of market volatility, I bonds offer comfort because they are backed by the U.S. government.

During the summer of 2022, inflation soared to levels we hadn’t seen in 40 years, resulting in widespread increases in the prices of everyday goods and services. Not only did day-to-day expenses increase, but many people saw significant downturns in their investment accounts as well, leaving them wondering if there was a better way to safeguard their money.

The answer to those woes may lie in Series I savings bonds, or I bonds. These U.S. government-issued bonds pay you back at two different rates: one fixed, currently 1.30%, and one that’s related to the consumer price index, or CPI, a widely followed measure of inflation. Fixed rates are announced on May 1 and Nov. 1 and apply to I bonds issued in the next six months. Inflation rates usually change every six months and are also set on May 1 and Nov. 1.

If you’re still uncertain about I bonds, we’ll provide additional insight to help you determine whether they could be a viable investment option.

Are I bonds a good investment?

I bonds generally are safe investments, making them good options for people who prefer lower risk portfolios, says Micheal Collins, founder and CEO at WinCap Financial.

Because they are backed by the full faith and credit of the U.S. government, you won’t see the same kind of volatility you might have with other investments, Collins adds. Plus, they perform well during periods of high inflation.

But before we answer this question in more detail, it would be beneficial to explain what an I bond is. An I bond is a type of savings bond issued by the U.S. Treasury that is designed to protect investors from inflation. Unlike traditional savings bonds, the composite interest rate on an I bond usually changes every six months based on changes in the CPI, ensuring that the bond’s value keeps pace with rising prices.

I bonds issued from Nov. 1, 2023, to April 30, 2024, have a composite rate of 5.27%. That includes a 1.30% fixed rate and a 1.97% inflation rate. Because I bonds are fully backed by the U.S. government, they are considered a relatively safe investment.

Only individuals and certain entities can buy I bonds. You can buy $10,000 per year in electronic I bonds and an additional $5,000 per year in paper I bonds, which must be purchased with your federal tax refund. They are relatively affordable, with electronic I bonds starting at $25 and paper I bonds starting at $50.

Can you lose money on I bonds?

The answer to this question, according to Stuart D. Boxenbaum, chief financial planner and investment retirement advisor at Statewide Financial Group, is yes and no.

“With I bonds, your principal is protected and safe. However, if you cash the bond out before five years, then you will lose up to the last three months of accrued interest. So you can’t lose what you put in, but you can lose earned interest,” Boxenbaum says.

Should you put emergency funds into an I bond?

I bonds are great, safe investments, but they’re paid out at the end of their 30-year maturities. You can cash them in after 12 months. But if you redeem an I bond within five years of purchase, you give up the last three months of interest.

Also be aware that while you can purchase I bonds online directly from the Treasury, you can’t buy or sell them in the secondary securities market. That makes them difficult to offload in the event of an emergency in which you need your money quickly.

Most people buy I bonds online, but if you buy a paper bond, say, as a gift for someone, keep in mind that they can’t simply ask a broker to unload it. Paper bonds can be cashed only by sending them to the Treasury or by finding a bank that will accept them.

Should you move your 401k or retirement money into I bonds?

You can’t purchase I bonds within retirement accounts like 401(k)s or IRAs since they already have tax advantages. Since there are no payouts until the bond matures or is sold, you won’t owe taxes until then. When you cash out, you will owe federal taxes but no state or local taxes.

“It can be OK to move some of your 401(k) or retirement money into I bonds, with the emphasis being to add flexibility to your retirement strategy,” Boxenbaum says.

When do I bond rates change?

The interest on I bonds is a combination of:

I bond returns vs. the stock market

While stocks may offer higher returns over the long term, they also come with greater risks due to market volatility. I bonds, on the other hand, provide a safe and predictable investment option with a guaranteed return that keeps up with inflation.

Deciding between I bonds and stocks is subjective and depends on your individual financial goals, risk tolerance and investment horizon. During times of high inflation, I bonds can be particularly attractive due to their potential to provide impressive returns.

How long does it take for I bonds to mature?

I bonds take 30 years to mature. If you’re still holding the I bond 30 years from its purchase date, you can redeem it to collect the interest it earned over that time as well as the face value, or what you originally paid.

Is it easy to cash in your I bonds?

Electronic I bonds can be bought and sold with ease using the TreasuryDirect online portal. Log in and use the link for cashing in securities in ManageDirect.

For paper bonds, you have two options:

If you hold an account at a local bank and it cashes savings bonds, ask the bank if it will cash yours. The answer may depend on how long you’ve had an account there. Find out what dollar limit, if any, the bank has on redemptions and what identification and other documents you may need. Note that some banks may not cash savings bonds at all.

Send your bonds to Treasury Retail Securities Services, along with FS Form 1522. You don’t need to sign the bonds. You will have to validate your identity. FS Form 1522 explains how to do that and includes the address.

You must hold I bonds for at least 12 months before redeeming them. Then, you can cash in a minimum of $25 or any amount above it in penny increments. If you cash only a portion of a bond’s value, you must leave at least $25 in your TreasuryDirect account. When you redeem, you get both the initial principal and interest.

Overall, I bonds can be a safe investment option for individuals seeking to protect themselves from inflation while earning a decent return. While they may not offer the high returns of riskier investments like stocks, they provide a low-risk alternative that can provide a guaranteed return and help hedge against inflation.

Frequently asked questions (FAQs)

I bonds can be useful additions to an investment portfolio as low-risk assets that provide guaranteed returns and help hedge against inflation.

They offer a haven during times of market volatility or high inflation, as their interest rates are adjusted based on changes in the CPI. But it’s important to consider your financial goals and risk tolerance when deciding whether I bonds fit into your investment strategy.

While I bonds can be a safe investment option, there are a few potential downsides to consider. One drawback is that I bonds have a lower maximum investment limit than investments like stocks. Additionally, the interest earned on I bonds is subject to federal income tax, although it can be deferred until the bonds are redeemed.

I bonds also have a one-year holding period before they can be redeemed, and there is a penalty for redeeming them before you’ve held them for five years. It is crucial to consider these factors and assess your financial situation before making an investment decision.