How Series I Savings Bonds Work: Rates, Redemption and Taxes

Series I savings bonds are Treasury‑issued securities that combine a fixed interest rate with a semi‑annual inflation adjustment, allowing the bond’s value to grow with consumer‑price changes. The overall rate can rise or fall every six months, but the fixed component—currently 0.90% for bonds issued May 1 2026 to October 31 2026—remains unchanged [1].

Key takeaways

• The interest rate on an I bond is reset every six months based on inflation, while the fixed rate stays constant [1].
• Interest compounds semi‑annually; each six‑month period applies the current rate to the updated principal [1].
• Bonds can be redeemed after 12 months, but cashing in before five years forfeits the last three months of earned interest [1].
• Federal income tax applies to the earnings, but state and local taxes do not; investors may elect to defer reporting until redemption [1].
• Using the bond’s proceeds for qualified higher‑education expenses can exempt the earnings from federal tax [1].

Rate Mechanics and Growth

Series I bonds earn interest monthly, but the compounding occurs every six months. At each compounding date the bond’s principal is increased by the accrued interest, and the new, larger principal becomes the base for the next period’s calculation. Because the inflation component is recalculated twice a year, the overall rate can move up or down, directly affecting the bond’s future value. The fixed rate of 0.90% applies for bonds issued between May 1 2026 and October 31 2026 and does not change over the life of the bond.

Investors can track the current value of electronic I bonds through their TreasuryDirect account, while paper‑bond holders may use the Treasury’s Savings Bond Calculator to estimate redemption amounts. When a bond reaches maturity—30 years from issue—the Treasury automatically pays the full amount for electronic bonds; paper bonds must be presented for cashing [1].

Redemption Rules and Tax Treatment

The earliest a holder may redeem an I bond is after 12 months. If redemption occurs before the five‑year mark, the Treasury withholds the last three months of interest as a penalty, effectively shortening the earning period (e.g., cashing in after 18 months yields only 15 months of interest) [1]. After five years, bonds can be redeemed without this penalty, though the investor still forgoes any future interest accrual.

For tax purposes, the bond’s earnings are subject to federal income tax but are exempt from state and local taxes. Holders may choose to report interest annually or defer reporting until the bond is cashed in. Additionally, if the proceeds are used to pay qualified higher‑education expenses, the earnings may be excluded from federal tax liability, providing a potential tax advantage for students and families [1].