How is interest on I bonds calculated?
The interest gets added to the bond's value
Variable interest rates are a risk you can't discount when you buy an I bond, and it's not like you can just sell the bond when the rate falls. You're locked in for the first year, unable to sell at all. Even after that, there's a penalty of three months' interest if you sell before five years.
May 1, 2024. Series EE savings bonds issued May 2024 through October 2024 will earn an annual fixed rate of 2.70% and Series I savings bonds will earn a composite rate of 4.28%, a portion of which is indexed to inflation every six months.
Consequently, when you buy a new bond, interest does not show until the first day of the fourth month following the issue month.
Yes, you can purchase up to $10,000 in electronic I bonds each calendar year.
Boxenbaum, chief financial planner and investment retirement advisor at Statewide Financial Group. “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.
Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity. When the TIPS matures, if the principal is higher than the original amount, you get the higher amount. If the principal is equal to or lower than the original amount, you get the higher original amount.
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
Interest earned on I bonds is exempt from state and local tax but subject to federal tax. The interest is taxed in the year the bond is redeemed or reaches maturity, whichever comes first.
The optimal time to purchase I bonds is when inflation rates are high, which leads to greater returns. But the decision should align with your overall investment strategy and financial goals.
How to calculate I bond interest payment?
To calculate the annual interest payment for a bond, you can use the following formula: Interest Payment = (Coupon Rate Par Value) / Number of Interest Payments per Year. The bondholder would receive $30 in interest payments every six months.
I bonds earn interest from the first day of the month you buy them. Twice a year, we add all the interest the bond earned in the previous 6 months to the main (principal) value of the bond. That gives the bond a new value (old value + interest earned).

If a bond is redeemed before five years, the holder loses the last three months of interest. Occasionally, bond owners hold onto bonds after they have reached maturity and are no longer earning interest.
If you want to keep all your good interest and get the most out of your I Bonds you should cash out: after earning 3 months of lower interest and. just after the 1st of the month.
Normally, the interest you earn on your savings bonds becomes part of your gross income for tax purposes. Under certain conditions, though, you can avoid taxes on the interest by using it to pay for higher education.
You know the fixed rate of interest that you will get for your bond when you buy the bond. The fixed rate never changes. We announce the fixed rate every May 1 and November 1. That fixed rate then applies to all I bonds that we issue during the next 6 months.
Cons of Buying I Bonds
I bonds are meant for longer-term investors. If you don't hold on to your I bond for a full year, you will not receive any interest. You must create an account at TreasuryDirect to buy I bonds; they cannot be purchased through your custodian, online investment account, or local bank.
The September I Bond composite rate is 4.28% (US Treasury) which is 2.14% earned over 6 months. The September 2024 I Bond Fixed Rate is 1.30%. The November 2024 I Bond composite rate is projected to go below 3%! Read on to decide if you'd like to continue buying I Bonds, or if you'd rather cash them out.
Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.
If you're stashing cash for just a few years, locking in one of today's historically high CD rates is the better bet. But for long-haul savings, I bonds can ensure your cash is always safely out-earning inflation.
Do you pay taxes on I bonds?
The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.
I bonds, with their inflation-adjusted return, safeguard the investor's purchasing power during periods of high inflation. On the other hand, EE Bonds offer predictable returns with a fixed-interest rate and a guaranteed doubling of value if held for 20 years.
§ 359.16 When does interest accrue on Series I savings bonds? (a) Interest, if any, accrues on the first day of each month; that is, we add the interest earned on a bond during any given month to its value at the beginning of the following month.
I Bonds earn interest each month, and the interest is compounded every six months. You can earn interest on them for as long as 30 years, and can cash them out after 5 years without losing interest. You lose only three months interest if you cash them out before you reach 5 years.
You get a Form 1099-INT for the year in which you get the interest.