I-Bond Maturities
I-Bonds don't have a true maturity date like T-Bills or other bonds. In other words, you can cash your I-Bonds in whenever you want after the first twelve months without any risk to your original investment. However, if you cash I-Bonds within five years of your initial purchase, you will forfeit any interest earned during the previous three months. After the initial five-year holding period you can cash your I-Bond in whenever you want without any interest penalty.I-Bond Prices
Most I-Bonds are electronically issued at face value in minimum amounts of $25. Unlike many other bonds that are only issued in even increments ($50, $100, etc.), I-Bonds can be bought in any amount up to $5,000. In other words, an investor could buy a brand new I-Bond for $42.78.For investors wishing to buy I-Bonds in paper form, the U.S. Treasury still offers this service, though it is likely to be phased out in the future. Bonds bought in paper form can only be purchased in the following denominations: $50, $75, $100, $200, $500, $1,000, and $5,000.
Investors may only purchase up to $5,000 in I-Bonds in any given year.
I-Bond Interest Rates
The most important distinction to understand about I-Bonds is that they are "accrual bonds," meaning that any interest earned is added to the existing value of the bond. This is different than "coupon bonds" that send the interest payments to investors on a regular basis.
I-Bond interest rates are actually comprised of two separate rates that are combined to create a Composite Rate. As one of these underlying rates change, the Composite Rate on an existing I-Bond owned by an investor may also change.
The Fixed Rate is a base rate that is set every six months for new I-Bond purchases. All bonds bought during this period will keep this same base rate for their entire life.
The second of the two rates, known as the Inflation Rate, fluctuates every six months in response to changes in the Consumer Price Index for all Urban Consumers (also known as CPI-U). As this rate changes, so will the overall Composite Rate of an investor's existing I-Bond.
Taxes on I-Bonds
Holder of I-Bonds are allowed to defer taxation on each year's growth until they actually cash the bond in. When they're finally cashed in, all the accrued interest that was added to the bond will be includable in the investor's income for that year.Similar to Series EE bonds, I-Bonds that are cashed in to pay for college expenses may avoid taxation on the entire amount of income earned if certain rules and guidelines are met.
Buying I-Bonds
I-Bonds can only be bought directly by individuals. They cannot be purchased in Coverdell ESA's, UGMA or UTMA accounts, or Section 529 plans.The easiest way to purchase I-Bonds is directly from the U.S. Treasury online at www.TreasuryDirect.gov. You can also buy them at many banks and through payroll deductions, though both of these methods take 1-2 weeks to complete the transaction.
