DEFINITION of 'Series I Bond'

A non-marketable, interest-bearing U.S. government savings bond that earns a combined:
1) fixed interest rate; and
2) variable inflation rate (adjusted semiannually).
Series I bonds are meant to give investors a return plus protection on their purchasing power. Additionally, the interest income is only taxable at the federal level, not at the state and local levels. Most Series I bonds are issued electronically, but it is possible to purchase paper certificates with a minimum of $50 using your income tax refund.

BREAKING DOWN 'Series I Bond'

The two types of interest that a Series I bond earns are 1) an interest rate that is fixed for the life of the bond; and 2) another rate that is adjusted each May and November based on changes in the nonseasonally adjusted consumer price index for all urban consumers (CPI-U). Series I bond interest is compounded every six months.

Series I bonds are considered low risk since they are backed by the full faith and credit of the U.S. government and their redemption value can’t decline. But with this safety comes a low return, comparable to that of a high-interest savings account or certificate of deposit. Corporate and municipal bonds, however, can lose value; with this risk comes a higher return.

Series I bonds can be issued in any amount between the minimum and maximum purchase thresholds. The minimum purchase is $25, and the maximum annual purchase is $10,000 per Social Security number. I-bonds can be held for as little as one year or as long as 30 years, but if they are sold after fewer than five years, the holder sacrifices the last three months worth of interest.

Sometimes I-bond income is also tax free at the federal level if it is used to pay for higher education. When you sell an I-bond and use the proceeds to pay for qualified higher education expenses at an eligible institution in the same calendar year, the interest is exempt from federal income tax.

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