9 Pros and Cons of Investing in I Bonds

"I bonds" might be right for your portfolio, but it’s important to weigh the advantages and disadvantages.

By Sarah Sharkey

Edited by Chris Kissell

Updated Oct. 9, 2024

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Many investors love I bonds and view them as an important part of their savings strategy. But before you make money moves such as purchasing I bonds, it’s a good idea to consider the pros and cons.

I bonds come with many benefits, but there are some drawbacks. Here are eight pros and cons of purchasing I bonds.

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What are I bonds?

Series I bonds — sometimes simply known as I bonds — are a type of savings bond the U.S. Treasury issues. These savings bonds are different because they offer protection against inflation.

Generally, the government issues I bonds electronically. Buyers can purchase $10,000 worth of I bonds each year.

In the past, you could purchase an extra $5,000 in I bonds via a paper certificate by using your income tax refund. However, after Jan. 1, 2025, that option will disappear.

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Pro: They offer inflation protection

The major benefit of investing in an I bond is protection against inflation. When you purchase an I bond, the interest rate changes every six months. Each new rate is calculated from a fixed rate and an inflation rate.

Although the fixed rate never changes, the inflation rate will change based on how fast prices are rising.

I bonds give your funds a fighting chance of keeping up with rising prices. An I bond earns interest for 30 years, unless you cash it in before the maturity date.

Pro: There is virtually no risk of losing your principal

The U.S. Treasury issues I bonds. That means the full faith and credit of the U.S. government backs these bonds. So, there is very little risk of losing your principal.

If you shy away from other investment opportunities due to the risk of losing money, this level of safety could make I bonds the right fit for your situation.

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Pro: You can defer the taxes -- sometimes permanently

With an I bond, you can either choose to report interest earned each year or defer reporting interest until the year you actually receive the interest.

Since an I bond doesn’t mature for 30 years, you can defer paying taxes on your interest earnings for up to 30 years.

After the 30-year mark, you won’t be able to defer taxes on the interest earnings. However, if you use the funds from an I bond to pay for qualified higher education costs, you might not have to pay taxes on the interest earnings at all.

Pro: Returns can be high during periods of soaring inflation

When inflation is soaring, it’s natural to be concerned about your money holding its value. While some investments won’t keep pace with inflation, the returns attached to I bonds rise along with inflation.

That means your money can maintain or even slightly grow in purchasing power even if inflation is sky-high.

Con: Returns are modest in periods of low inflation

As mentioned, the interest rate attached to I bonds rises and falls based on inflation. When inflation is relatively low, I bond investors should expect relatively modest returns.

Of course, no one is rooting for high inflation. But periods of soaring inflation typically offer the best returns for I bond investors.

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Con: You can only purchase $10,000 worth of bonds annually

Even if you love what I bonds have to offer, there is a limit to how many I bonds you can purchase each year.

Each individual can purchase up to $10,000 in electronic I bonds per year. Depending on your investing goals, this cap might not allow you to buy as many bonds as you truly want.

Con: You must hold them for at least 1 year

If you purchase I bonds, you cannot cash them in for at least 12 months. After the one-year mark, you can cash the bonds in before your 30-year maturity date.

However, there will be penalties attached. For example, if you cash in the bond before the five-year mark, you will lose the last three months of interest.

If you think you will need the funds in the short term, then a high-yield savings account might be a more appropriate option than an I bond.

Con: You have to buy them through TreasuryDirect.gov

Investors must purchase I bonds directly through the TreasuryDirect website. Unfortunately, this means creating a new account outside of your brokerage or banking platform to make the purchase.

Once you buy I bonds, you won’t receive statements of any kind. Instead, you will have to log in to your account to track the holdings on your own.

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Bottom line

Whether you are a seasoned investor or simply ready to start building your net worth, I bonds might be a great addition to your portfolio.

Although these types of savings bonds come with limitations, the benefits could make them a worthwhile option for many investors.

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