How I Bonds Can Help Protect You From Inflation

Series I Savings Bonds, commonly called I bonds, are issued by the U.S. Treasury and provide a return made up of two parts: a fixed rate and an inflation-based rate. The inflation rate changes twice a year based on movements in the Consumer Price Index for All Urban Consumers (CPI-U), while the fixed portion remains the same for the life of the bond. These components work together to produce a composite yield that shifts with inflation, allowing the bond’s value to keep pace with rising prices while offering a guaranteed minimum return from the federal government.

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What Are I Bonds?

I bonds were introduced by the U.S. Treasury in 1998 to help savers protect their money from inflation. They can be held for as little as one year or up to 30 years. Each bond has two components: a fixed rate, which is set at purchase and remains the same for the life of the bond, and an inflation rate tied to the CPI-U, which is updated every May 1 and November 1.

Interest is compounded semiannually, with earnings added to the bond’s principal. When the Treasury updates the inflation rate in May and November, it recalculates the bond’s composite rate. This is the combined effect of the fixed and inflation components. I bonds are sold at face value, and their composite rate can never drop below zero, even if deflation occurs. This feature helps preserve their value over time.

The combined, or composite, rate for I bonds is calculated using the formula: fixed rate + (2 × inflation rate) + (fixed rate × inflation rate), with rates expressed as decimals.

For example, if you purchase $1,000 in I bonds with a fixed rate of 1.10% and a current inflation rate of 1.43%, the composite rate ends up being 3.98%.

Advantages of I Bonds

Several aspects of these bonds make them attractive:

• Inflation protection: The current combined interest rate (May 1, 2025 – October 31, 2025) is 3.98%¹. Inflation through the first six months of 2025 averaged 2.6%, including 2.4% in May and 2.7% in June.
• Tax efficiency: Series I Savings Bonds are not subject to state or local taxes.
• Government backing: They have the security of a U.S. government guarantee.
• Easy to buy: You can buy up to $10,000 worth of them online. You also can buy an additional $5,000 of paper bonds using your federal income tax refund.

Potential Drawbacks of I Bonds

I bonds come with certain rules and restrictions that may reduce their attractiveness for some fixed-income investors. Because the inflation rate is tied to the CPI-U, returns can decrease if inflation slows. They are available only to U.S. citizens, legal residents and civilian employees of the U.S. government, regardless of where they live. In addition, they cannot be traded or sold on a secondary market.

Finally, I bonds also carry these restrictions related to cashing them in:

• Within one year of purchase: You cannot cash the bond out for any reason less than one year from purchase.
• Within one year and five years of purchase: You can cash out the bond, but you’ll forfeit the previous three months of interest payments. For example, if you cashed it out during this “early redemption” period in April 2025 then you won’t receive any interest earned from January, February and March 2025.
• Five years or longer: If you want to avoid a penalty, you have to wait at least five years to cash out the bond.
• After 30 years of purchase: The bond ceases to pay interest and becomes vulnerable to inflation.

How I Bonds Fit Into an Investment Strategy

I bonds can serve as a low-risk component in a diversified portfolio, particularly for those seeking protection against inflation without sacrificing principal. Because their returns adjust to changes in consumer prices, they can complement assets like stocks or mutual funds, which carry higher volatility. Their tax-deferred federal treatment also makes them appealing for savers in high-tax states.

However, their annual purchase limits and lack of a secondary market mean they work best as a supplement to other investments rather than a primary income source. For investors who value stability and inflation protection, I bonds can help balance exposure to market fluctuations.

They can also play a role in short- to medium-term financial planning. For example, some investors use I bonds as a safe place to store funds for future expenses, such as education costs, home renovations or bridging the gap to retirement. Since the interest is exempt from state and local taxes and may be tax-free at the federal level if used for qualified education expenses, they offer additional flexibility.

When paired with other fixed-income products like Treasury Inflation-Protected Securities (TIPS) or high-yield savings accounts, I bonds can help create a layered approach to income and capital preservation.

Bottom Line

Series I Savings Bonds are low-risk savings bonds issued by the U.S. government that can protect your cash from the negative effects of inflation. The combined interest rate as of August 2025 was 3.98%. I bonds can be purchased in two ways: electronically through TreasuryDirect for up to $10,000 per year, or as paper bonds worth up to $5,000 using your federal income tax refund. Using both methods, an individual can acquire as much as $15,000 in I bonds annually. These bonds cannot be resold or traded in any secondary market.

Tips for Fixed-Income Investing

• A financial advisor can help you handle the fixed-income portion of your portfolio as inflation and interest rates change. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Check out SmartAsset’s no-cost inflation calculator to help you determine the buying power of a dollar over time in the United States.

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