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How To Use I Bonds for Retirement Income

I Bonds Deliver an Inflation Adjusted Return


I Bond Basics

  • I Bonds are a safe investment issued directly by the U.S. Treasury. Your principal is guaranteed.
  • I bonds pay interest in two ways: a fixed interest rate and a variable rate that is based on inflation.

I Bond Rates

I Bonds earn interest in two ways: a fixed rate that is determined at the time the bond is issued, and an inflation-indexed rate which is adjusted every six months based on inflation as measured by the consumer price index.

When the fixed rate is zero: for the I Bonds issued in November 2010, May 2011, and November 2011, the fixed rate was set at zero, so those bonds will only pay the rate that is determined and set every six months based on inflation.

When the inflation-indexed rate is negative: In May 2009, the variable rate based on inflation was negative (a sign of deflation). In such a situation it is possible your I Bond could have a six month period where it pays no interest, however your principal value is protected and your bond cannot be reduced in value below below its value the prior month.

See Rates and Terms for a history of the fixed and inflation-indexed rates that have applied to I Bonds.

How to Buy an I Bond

Starting January 1, 2012, paper I Bonds will no longer be issued, so you will purchase your I Bonds directly from the Treasury by opening an account electronically.

  • Minimum purchase amount: $25
  • Maximum purchase per calendar year per person: $10,000

How to Sell I Bonds

I Bonds can be redeemed directly from the Treasury after you have owned them for at least twelve months. If redeemed within the first five years of ownership an early redemption penalty applies and you will forfeit three months worth of interest. After owning the I bonds for five years they can be redeemed without a penalty.

Why Buy I Bonds?

I Bonds offer several attractive features:

Principal protection. Your investment is 100% guaranteed by the U.S. Treasury.

Purchasing power protection. A portion of the interest you receive is based on inflation as measured by CPI-U announced in May and November. The other portion of the interest earned is a fixed interest rate which is set at the time the bond is issued. Easy to buy. It is easy to open an account online and accumulate I Bonds.

Are I Bonds Good If You Need Current Income?

The interest on I Bonds accrues, which means it is added monthly to the value of your bond rather than being paid out directly to you. Since I Bonds don’t pay the interest out to you on a regular basis, if you use I Bonds for income you would want to build a bond ladder.

Example of an I Bond Ladder

Suppose you were ten years away from retirement. One strategy would be to buy $5,000 of I Bonds each year for ten years, with the intention of redeeming their accrued value each of the first ten years of retirement.

Or you could buy $5,000 each year for ten years, redeeming them each year starting with your tenth or twentieth year of retirement.

I Bonds pay interest for thirty years, so there is no benefit to holding them any longer than thirty years.

How is I Bond Interest Taxed?

I Bond interest accrues, adding to the value of the bond, rather than being paid out. You pay taxes on this accrued interest only when you redeem your bond, so I Bonds offer tax-deferral.

I bond interest is exempt from state taxes.

Because of the tax-deferred nature of I Bond interest, there is no reason to own I Bonds within a tax-deferred retirement account, although you could. However if you own them in a retirement account you may lose the benefit of the tax-exempt interest at the state level.

A good tax strategy would be to buy I Bonds when you are in a higher tax rate, and sell them later, perhaps in retirement, at a time when your tax rate may be lower.

If used to finance education, I bond interest may be excluded from federal taxation.

Learn more: Tax Benefits of I bonds and EE bonds for financing education

Inflation Feature of I Bonds

I Bonds are not the only investment that offers inflation protected. TIPS, or Treasury Inflation Protected Securities, also offer inflation protection, but there are differences in the way the two securities work.

Learn more: TIPS vs I Bonds

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