What Series I Savings Bonds Are and How They Work

Series I savings bonds are the savings bond that tries to keep up with inflation. They are not a stock, they are not a bank CD, and they are not a Treasury bill you can sell on a random Tuesday. You buy them from the United States Treasury, you hold them inside a set of rules, and the rate you see in a headline is a blend of two pieces that do not behave the same way. This guide takes the blend apart with the Treasury's own formula, then covers the purchase cap, the lockup, the penalty, and the tax timing. The numbers that follow are the ones Treasury and the IRS have published. Where a household example goes further, it is labeled as an example.

The two rates inside one bond

An I bond earns a composite rate, sometimes called the earnings rate. Treasury builds it from a fixed rate and an inflation rate. The fixed rate is set when you buy that bond and stays with that bond for as long as it earns interest, up to 30 years. The inflation rate changes every six months. Treasury resets the inflation piece each May 1 and November 1, using the non-seasonally adjusted Consumer Price Index for all urban consumers. When inflation rises, the composite on new and existing I bonds can rise. When inflation falls, the composite can fall. Treasury stops at zero. The composite does not go negative.

For I bonds issued from May 1, 2026 through October 31, 2026, Treasury announced a composite rate of 4.26 percent that includes a fixed rate of 0.90 percent. That composite applies for the first six months after the issue date of a bond bought in that window. It is not a promise that your bond will show 4.26 percent for 30 years. Six months later, the inflation piece resets. The 0.90 percent fixed rate on that particular bond does not reset.

The formula Treasury publishes is worth doing once so the headline stops looking magical. Composite equals the fixed rate, plus two times the semiannual inflation rate, plus the fixed rate times the semiannual inflation rate. For the May 2026 announcement, the fixed rate is 0.90 percent, or 0.0090, and the semiannual inflation rate is 1.67 percent, or 0.0167. Add 0.0090 plus 0.0334 plus 0.0090 times 0.0167. That last cross term is 0.0001503. The sum is 0.0425503, which rounds to 0.0426, or 4.26 percent. Treasury also described the inflation piece as a 3.34 percent annualized rate, from the CPI-U moving from 324.8 in September 2025 to 330.213 in March 2026, a six-month change of 1.67 percent. If you only remember "4.26," you will misread the next announcement. Remember the two inputs.

What you can buy, and what you cannot

TreasuryDirect has long limited electronic I bond purchases to $10,000 per person per calendar year, with a separate path of up to $5,000 in paper bonds bought with a federal tax refund. Confirm the cap on TreasuryDirect in the year you buy. Purchase rules can change, and a guide should not outrun the purchase page. The minimum electronic purchase is $25. You can buy in penny increments above that, which is useful when you want to put a specific tax-refund slice to work rather than a round thousand.

The cap is per person, not per household. Two spouses can each use their own TreasuryDirect account and each buy up to the electronic cap. A child can be an owner too, with the rules TreasuryDirect sets for minor linked accounts. Do not treat a stack of accounts as a clever way around a rule you have not read. The useful version is ordinary: each person who actually owns the bond uses their own cap.

You cannot redeem an I bond in the first 12 months. That first year is a hard lock, not a penalty you can pay to get out. If the cash might be the emergency fund, it does not belong in an I bond. After 12 months, and before 5 years, redemption is allowed and you forfeit the last three months of interest. After 5 years, that three-month penalty drops away. The bond stops earning interest at 30 years. Those gates are the product. A savings account that you can empty on a Saturday morning is a different product, even when the APY on a given week looks similar.

A labeled $10,000 purchase

Suppose you buy the electronic maximum, $10,000, in June 2026, inside the window whose first composite is 4.26 percent. The first six months use that composite. This illustration does not pretend to know the inflation rate Treasury will announce the following November. Anyone who gives you a 30-year dollar figure for an I bond is guessing the future CPI path and calling it a schedule.

You can still see the shape of the early penalty. If you redeem at month 13, you give up the most recent three months of interest. You have lived through a rate reset you cannot know today, so the dollar penalty is not a single number a guide should invent. The planning fact is enough: money you might need in month nine cannot go in, and money you might need in month 15 should be sized so that losing three months of interest is annoying rather than dangerous. After month 60, the three-month forfeiture ends. Many savers who use I bonds for a known medium-term goal, such as a house fund that is genuinely five or more years away, treat year five as the first clean exit.

Interest accrues monthly and compounds semiannually. You do not receive a coupon check. The value sits in the TreasuryDirect account until you redeem. That is convenient if your weakness is spending a monthly interest deposit. It is inconvenient if you wanted income to pay a bill. I bonds are an accumulation tool with a cash-out gate, not a paycheck.

How the tax timing actually works

For federal income tax, savings bond interest is taxable. IRS Topic 403 says you can elect to include the interest each year, but most people who use the cash method, which is most households, do not include Series I interest until the earlier of redemption, disposal, or final maturity. You can choose to report annually. Once you start that method, you are in a pattern the IRS expects you to keep, so do not elect it because a forum post said it was clever. For a buy-and-hold saver, deferral until redemption is the common path, and it means a lump of interest lands in one tax year.

The same IRS topic says interest on Treasury bills, notes, and bonds is subject to federal income tax and exempt from state and local income taxes. Savings bond interest follows that federal-versus-state split. A state with an income tax is one reason some savers compare an I bond with a bank CD, whose interest is taxable by the state as well. Run the comparison after state tax, not before. A CD with a slightly higher APY can lose to an I bond once the state tax is in the arithmetic, and the reverse can be true in a state with no income tax. There is no universal winner.

If you cash bonds and your total taxable interest for the year is more than $1,500, the IRS says you complete Schedule B and attach it to Form 1040. If your interest is not over $1,500 and you are not otherwise required to use Schedule B, you can report the interest on the interest line. The bank or TreasuryDirect reports the interest on Form 1099-INT when you redeem. Deferral is not the same as forgetting. The year you redeem is the year the number shows up.

There is a narrow education exclusion. Interest on Series EE and Series I bonds issued after 1989 may be excluded, in whole or in part, if you use the proceeds for qualified higher education expenses and you meet the other tests, including income limits that change. You figure it on Form 8815. Married filing separately does not qualify. The exclusion is not a reason to buy I bonds "for college" unless you have read the current Publication 550 tests, including whose name must be on the bond. A grandparent-owned bond and a parent-owned bond are not interchangeable for this exclusion.

I bonds next to TIPS, CDs, and savings accounts

Treasury Inflation-Protected Securities also respond to inflation, and they are a different contract. TIPS pay a coupon, adjust principal with CPI, can be bought and sold in the market, and can show a price loss if you sell before maturity when real yields have risen. An I bond does not have a market price you watch at 2 p.m. You redeem with Treasury under the holding-period rules, and the composite does not go below zero. You also cannot put $100,000 into I bonds this year in one name. The electronic cap stops you. TIPS do not have that retail cap. If the job is "inflate a large taxable portfolio," I bonds are a small sleeve. If the job is "park up to the annual cap in a savings bond I will not trade," I bonds are built for that job.

A bank CD can pay a fixed APY and can be FDIC-insured. It can also charge an early-withdrawal penalty that reaches into principal, and the interest is taxable by your state. A high-yield savings account has no term and a rate the bank can change on its own schedule. An I bond's inflation piece changes on Treasury's six-month schedule, and the fixed piece on the bond you already own does not change. None of these is a risk-free substitute for the others. The question is which gate you can live with: a bank penalty, a floating savings rate, a market price, or a 12-month lock plus a possible three-month interest forfeiture.

The slider below is not an I bond projection. It is ordinary compound math at a rate you type, so you can see what a flat yield would do if it actually stayed put. An I bond will not stay at 4.26 percent for the years you dial in. Use the slider as a measuring stick, then go back to the six-month reset.

Paper bonds, gifts, and the login you must not lose

The paper path is the odd one. Up to $5,000 of paper I bonds can be bought with a federal tax refund, using the form the IRS pairs with the refund. It is not an extra electronic slot. It is a different delivery of a different slice, and it still has to fit the year's rules. People who count "$15,000 guaranteed" without reading the refund form are counting a cap they may not qualify to use. If you are not due a refund, the paper path is not available just because you would like it to be.

Gift purchases sit inside TreasuryDirect's gift-box rules. A gift bond generally counts against the recipient's purchase limit in the year it is delivered, not as a silent extra cap for the buyer. That sentence surprises people who thought gifting was a workaround. Read the gift-box page in the year you use it. If the delivery would push the recipient over the annual electronic limit, the bond waits. Waiting is not the same as losing it, and it is also not the same as a clever overflow account.

The account itself is the record. TreasuryDirect does not behave like a brokerage you can call and charm. If you lose access, recovery is a form and a wait, not a chat window. Store the login the way you store a title. Name a co-owner or a beneficiary on the bond. Tell that person the account exists. A 30-year savings bond that nobody else knows about is not a plan. It is a scavenger hunt with a rate reset.

Who should walk past the buy button

Skip I bonds if the money is your only emergency reserve. The first 12 months are unavailable. Skip them if you need monthly income. Nothing is paid out until you redeem. Skip them if you are trying to invest a large sum this month. The cap will stop you, and stretching the rule through accounts you do not truly own is a mess you do not want with Treasury. Skip them if you will redeem in month 13 out of boredom and then feel cheated by the three-month forfeiture. The forfeiture is published. Boredom is not a surprise.

They fit a narrower person. You already have liquid savings. You have up to the annual cap you will not need for at least a year, and preferably five. You like that the inflation piece resets and that the composite cannot print a negative rate. You are willing to track a TreasuryDirect login with the same seriousness you track a bank login, including the password and the beneficiary settings. You understand that a 4.26 percent composite is a six-month fact about bonds issued in a specific window, not a career forecast.

Beneficiaries and co-owners are worth setting when you buy, not after a death makes the form harder. TreasuryDirect's registration choices are the estate plan for this asset. A bond that only one spouse can see, with no survivor instructions, is a scavenger hunt. Spend the extra minutes on the registration screen.

A clean way to use the cap without drama

Decide the dollar amount before you look at the rate announcement, so a loud week does not push emergency money into a 12-month lock. If you want the full electronic cap, buy it once you have confirmed the cap and you have the cash. If you want to average your fixed rates across years, buy a smaller slice each year and accept that each bond keeps the fixed rate of its own issue window. That is a real diversification of the fixed rate. It is not a market-timing system. You still cannot know whether next May's fixed rate will be higher.

Keep a one-line note with the issue month, the fixed rate on that bond, and the first month you are allowed to redeem. When the five-year mark arrives, decide again with the composite then in force and with whatever the money is for. Redeeming because a savings account briefly pays more can be reasonable. Redeeming because a headline said "rates," without checking your own fixed rate, is how people sell the bond they actually wanted to keep.

What to verify on the day you buy

Open the TreasuryDirect rate page and read the fixed rate and the composite for the current window, not a screenshot from spring. Read the purchase limit for the calendar year. Confirm you can live with 12 months of no redemption. If the goal is education, read Form 8815's current rules before you count on an exclusion. When you eventually redeem, expect the interest in that year's federal income and expect it to stay out of your state return if your state follows the federal treatment of savings bond interest. If your state does something unusual, the state instructions win.

I bonds are a slow, rule-bound savings tool issued by the Treasury. They are good at the job described on the rate page. They are bad at being an emergency fund, a trading vehicle, or a bottomless account. Buy them for the job they actually do, with the formula visible, and leave the rest of the cash somewhere that can move when the month gets loud.