Glossary
I Bonds and EE Bonds
Series I savings bonds pay a fixed rate plus an inflation adjustment reset every May and November; Series EE bonds guarantee to double in 20 years. They are the Treasury's inflation-proof savings instruments, with a $10,000 annual purchase cap.
What it is
US savings bonds are Treasury instruments sold directly through TreasuryDirect, in $25 increments up to an annual purchase cap. Series I bonds pay a composite rate: a fixed rate set at purchase, never changing, plus a semiannual inflation adjustment indexed to CPI-U that resets every May and November. Series EE bonds pay a printed fixed rate, but carry the kicker: a guarantee to double in value after 20 years, an implied return of about 3.5% regardless of the printed rate.
The purchase cap is $10,000 per person per year in electronic I bonds, plus $5,000 in paper bonds through a tax refund. Funds are locked for 12 months, and redeeming before five years forfeits the last three months of interest. Federal tax defers until redemption; state and local tax is always exempt.
Key takeaways
- I bonds pay a fixed rate plus a semiannual CPI-U adjustment, reset every May and November.
- The cap is $10,000 per person per year electronically, plus $5,000 in paper bonds via tax refund.
- EE bonds guarantee to double in 20 years, an implied roughly 3.5% return, whatever the printed rate.
- Funds lock for 12 months; redeeming before five years forfeits the last three months of interest.
- Federal tax defers until redemption, and state and local tax is always exempt.
How it works
The I bond composite rate is a formula: fixed rate plus twice the semiannual inflation adjustment. A bond bought in a month carrying a 1.20% fixed rate and a 2.20% semiannual adjustment pays 1.20% plus two times 2.20%, or 5.60%, for six months. The rate announcement lands every May and November, and composite rates have run between roughly 3% and 7% since the 2022 inflation spike. EE bonds compound their printed rate, with the Treasury crediting the difference to double the purchase price at 20 years.
The mechanics around redemption are where the returns live or die. Redeeming inside the first 12 months is impossible; redeeming between months 13 and 60 forfeits the most recent three months of interest, roughly $125 on a $10,000 bond at a 5% composite rate. Federal income tax on the accumulated interest defers until redemption, and using proceeds for tuition can defer it further under the education exclusion, subject to income phase-outs. The cap is per person, so a household can buy $20,000 across two TreasuryDirect accounts. Lost paper bonds are recoverable, since TreasuryDirect tracks everything electronically and paper bonds are searchable by Social Security number.
Why it matters
Savings bonds are the only retail instrument that beats inflation with zero market risk, which makes them the natural home for the slice of savings that must not lose purchasing power: the emergency fund after year one, the house down payment with a known date, the conservative sleeve of any portfolio.
I watched a colleague named Brent (yes, that Brent) cash the EE bonds his grandmother bought him at 19 years and 9 months, collecting the face-rate value of roughly $1,660 per $1,000 where $2,000 was waiting at the double. The guarantee is cliff-shaped, and three months early walked past $340. He called the timing close enough.
The highest-leverage thing most Americans can do is fill the $10,000 cap every year with money that must not lose to inflation, and let each year's bonds season past the penalty window. Compare the yield against CDs with the CD calculator and price the inflation component with the inflation calculator. The cap is the ceiling; the rate is the floor.
Real-world examples
The composite rate: how an I bond pays
A bond bought in a month with a 1.20% fixed rate and a 2.20% semiannual inflation adjustment pays 1.20% plus two times 2.20%, or 5.60%, for its first six months. The inflation piece resets every six months; the fixed piece is permanent. A decade of 3% average inflation turns that bond into a 4.20% composite for life, whatever new buyers are offered. The composite has outrun CDs and most HYSAs in inflationary stretches, and the fixed component means yesterday's purchase keeps paying even when new buyers get less.
The 3-month penalty: $10,000 redeemed at month 13
A $10,000 I bond at a 5% composite rate earns roughly $543 of interest in its first 13 months. Redeeming at month 13 forfeits the last three months, about $124, leaving roughly $10,419 against $10,541 at month 25. The penalty is a haircut on interest only; principal never falls, and past 60 months the redemption is penalty-free. The same bond held to month 60 collects every month of interest, which is why the instrument suits money with a known date at least five years out.
The EE double: the cliff at year 20
A $1,000 EE bond bought at a 2.70% printed rate is worth roughly $1,660 after 19 years of compounding and exactly $2,000 after 20, because the Treasury credits the difference. The guarantee is the whole return story for recent vintages, where the printed rate sits far below the implied 3.5%. Cashing at year 19 collects $1,660 and walks past $340.
Common mistakes
Mistake: Redeeming inside the five-year window.
Why it bites you: The three-month interest penalty is a guaranteed haircut; on a $10,000 bond at a 5% composite rate it costs roughly $125 of interest, paid for nothing.
Mistake: Cashing EE bonds just before year 20.
Why it bites you: The doubling guarantee is cliff-shaped: three months early on a 2025-vintage bond walks past roughly $340 per $1,000.
Mistake: Overlooking the annual purchase cap.
Why it bites you: Excess purchases are refunded, so the year's capacity burns: the cap is $10,000 per person, and spouses can each buy the full amount, doubling the household cap.
Mistake: Assuming savings bonds are only for grandchildren.
Why it bites you: The instruments beat inflation with zero market risk; ignoring them leaves the emergency fund and down-payment money earning less than the inflation adjustment the Treasury is offering.
Ivy's take
I tracked every I bond rate announcement since the 2022 inflation spike so you don't have to, and the finding is that the instrument is a yield floor with a liquidity cost: the fixed rate never moves, the inflation piece follows CPI faithfully, and the price is a 12-month lock plus a three-month penalty on the way out. My rule is to buy the cap every January, earmark it for the down payment or the emergency fund, and never redeem inside five years.
Brent cashed his EE bonds three months before the double and called it close enough. The Treasury called it $340 per $1,000. Both statements were accurate.
Related jargon, defined
- Composite rate
- The I bond's total rate: fixed rate plus twice the semiannual inflation adjustment.
- Fixed rate
- The permanent component set at purchase; it never changes.
- CPI-U
- The consumer price index driving the semiannual inflation adjustment.
- TreasuryDirect
- The Treasury's platform where savings bonds are bought and redeemed.
- EE doubling guarantee
- The Treasury's commitment to double an EE bond's value at 20 years.
- Education exclusion
- Federal tax deferral on bond interest used for tuition, subject to income limits.
Frequently asked questions
How much can I buy in savings bonds each year?+
$10,000 per person per year in electronic I bonds, plus $5,000 in paper bonds through a tax refund. Spouses can each buy the full amount.
When can I cash an I bond?+
After 12 months of ownership, though redeeming before five years forfeits the last three months of interest. Past five years, redemption is penalty-free.
Are savings bonds a good investment?+
For money that must not lose to inflation and can tolerate a one-year lock, they are unmatched: zero market risk, state-tax-exempt, and inflation-indexed. Growth money belongs in the market instead.
How are I bonds taxed?+
Federal income tax defers until redemption, and state and local tax is always exempt. Using proceeds for qualified tuition can defer federal tax further under the education exclusion, with income phase-outs.
Which is better, I bonds or TIPS?+
I bonds offer zero price risk, deferred tax, and a purchase cap; TIPS offer uncapped quantities, market liquidity, and annual taxation of phantom income. They hedge the same inflation with different constraints.
Disclaimer: This information is general in nature and does not constitute financial or legal advice. Always consult a qualified professional for your specific situation.
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Ivy Sinclair-Wren
Financial Chaos Analyst
Ivy Sinclair-Wren is a Financial Chaos Analyst covering investing, AI, wealth psychology, and the emotional consequences of opening finance apps during market crashes. Based in Melbourne, she specializes in demystifying the US tax code and helping users navigate the intersection of spreadsheet logic and human irrationality.