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Military Finances 101: What's the Deal with I-Bonds?

Managing Your Finances

Back when I was a Lieutenant, I signed up for Savings Bonds through payroll deductions. I think I remember that being the Bond Drive POC was an additional duty (one I avoided). Those were EE Savings Bonds. Everybody is talking about I Bonds now. What's the deal with that?

What are I-Bonds?

I bonds are a debt of the US Government, so they are backed by the US Treasury. Unlike EE Savings Bonds, they are issued at face value. So, you pay $100 for a $100 I Bond. The bonds pay interest for 30 years. You can get them for as little as $25 and there is an annual purchase limit of $10,000.

The bonds have redemption limits. You must hold the bonds for at least one year. There are no waivers. If you redeem the bonds prior to holding them for 5 years, you will forfeit 3 months' worth of interest.

How is Interest Calculated on I-Bonds?

There are two sources of interest income. The first is the fixed portion. This is a set rate of interest paid for the life of the bond (30 years). The second source is an inflation-adjusted interest rate. This rate can and likely will change every six months based on the purchase date and it could be a negative number in times of deflation.

Interest is paid every month, but compounds semi-annually. In other words, you'll earn interest on the principal balance every month, but the amount of interest you earn interest on only updates every 6 months. If you cash out the bond in the middle of a 6-month cycle, you'll get the 3 months' worth of interest.

The interest rate cannot be less than 0%.

At present (Dec 21), I Bonds are paying an inflation-adjusted rate of 7.12% and a fixed rate of 0%, for a total of 7.12%

As mentioned above, if you redeem the bond prior to the 5-year anniversary, you lose 3 months' worth of interest

How are I Bonds Taxed?

While this may not be a big benefit to Active Duty Military Members (since most of you are residents of states without an income tax) states are not allowed to tax the interest on I Bonds (or any other Treasury Bond).

Federal taxes are assessed on I Bonds but are not due until the bond is redeemed or matures. You do have the option to pay the taxes each year, if desired. But if you do start paying the interest every year, you must continue to do so on the I Bond and all other Savings Bonds.

Should You Buy I-Bonds?

I Bonds can be considered a near-cash equivalent. You have zero principal risk but have limited access for the first year. If you have cash positions in your portfolio, they could be a better option than CDs. They can also be used for a portion of your emergency fund. Just be careful since you can't get to the funds for 12 months.

Military Finances are Different

While buying I Bonds isn't an option available only to Military Members, there are many unique tax benefits and financial concerns that apply only to active and retired military members. That is why we think you should work with a Financial Advisor or Planner that works with these issues each and every day. If that sounds interesting to you, give us a call or use the button below to schedule a free initial consultation.


If you found this article useful, you might like the following blog posts:

Military Finances 101: Where to Park Short-Term Money


Military Finances 101: Should I Use My Roth IRA as an Emergency Fund?


Extra "Credit" for GS Employees with Prior Military Service




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