Bonds course · Lesson 5 of 7
An I bond pays inflation plus a fixed rate, with limits.
An I bond is a savings bond from the U.S. Treasury. Its rate follows inflation, and part of the rate stays fixed for the life of the bond.
Two rates in one
| I bonds bought November 1, 2026 to April 30, 2027 | Rate |
|---|---|
| Fixed rate | 1.40% |
| Inflation rate for six months | 2.04% |
| Composite rate, a year | 5.51% |
The composite rate is the fixed rate, plus two times the six-month inflation rate, plus the fixed rate times the six-month inflation rate. For these bonds, that is 5.51% a year.
The fixed rate is set for the life of the bond. The inflation part changes every six months. So the fixed rate is your return above inflation. With the same inflation and a fixed rate of 0%, the rate would be 4.08%.
The rules
- Limit. You can buy $10,000 of electronic I bonds in each calendar year.
- Lock. You cannot cash an I bond in the first 12 months.
- Penalty. If you cash it before five years, you lose the last three months of interest.
- Tax. The interest is subject to federal tax, but you can wait until you cash the bond. There is no state or local income tax on it.
An example
| $10,000 bought in November 2026 | Value |
|---|---|
| After 6 months | $10,275.50 |
| After 12 months, if the rate stays the same | $10,558.59 |
| Cash at 12 months, less three months of interest | $10,416.08 |
If you cash the bond at 12 months, you lose about $142.51 of interest. After five years, the penalty stops. The Treasury rounds values in its own way, so real figures can differ by a few cents.
When an I bond fits
An I bond fits cash that you will not need for at least a year, and that you want to protect from inflation. The limit keeps it small in most portfolios. For larger amounts, use TIPS from lesson 4.
Key points
- The composite rate is 5.51% for bonds bought from November 1, 2026 to April 30, 2027.
- The fixed rate stays for the life of the bond. It is the return above inflation.
- Limit $10,000 a year. No cash for 12 months. Three months of interest lost before five years.
Sources
- 31 CFR 359.14, for the formula of the composite rate.
- 31 CFR 359.10, for the fixed rate that stays for the life of the bond.
- 31 CFR 359.6 and 359.7, for the 12-month hold and the three-month interest penalty before five years.
- 31 CFR 363.52, for the $10,000 limit each calendar year.
- IRS, Topic 403, Interest Received, for Treasury interest that is exempt from state and local income tax, and for savings bond interest that you can defer.
- 31 U.S. Code 3124, for the exemption of U.S. obligations from state tax.
- Tipswatch, October 30, 2026 and TheStreet, November 10, 2026, for the rates of November 1, 2026 to April 30, 2027.