Series I Savings Bonds combine a fixed interest rate with an inflation adjustment to help savers keep pace with rising prices. They are backed by the U.S. government and accrue interest monthly, with compounding every six months. Understanding the composite rate formula, the calendar for rate changes, how much you can buy each year, and when you can redeem helps you avoid penalties and make the most of their inflation protection.

How the rate is set

The I Bond composite rate blends two parts: a fixed rate set at purchase and an inflation rate that updates twice a year. Treasury calculates the composite rate using: composite rate = fixed rate + (2 × semiannual inflation rate) + (fixed rate × semiannual inflation rate). The semiannual inflation rate comes from the change in the CPI‑U over a six‑month window.

For illustration, suppose the fixed rate at your purchase is 0.9% (annual) and the semiannual inflation rate is 1.8%. The composite rate would be approximately 0.009 + (2 × 0.018) + (0.009 × 0.018) = 0.0452, or 4.52% annualized. Interest accrues monthly and compounds every six months. If the calculation would produce a negative number due to deflation, the composite rate floors at 0% for that period, and your redemption value will not decline.

When rates reset

Two national rate announcements occur each year, typically on or about May 1 and November 1. Those announcements set the fixed rate for new purchases and the inflation component for all bonds. Your bond’s composite rate changes every six months based on its issue month, not strictly on the May/November dates. For example, a bond issued in March earns its initial composite rate through August, then switches to the next applicable composite rate in September for the next six months.

Because compounding is semiannual, each six‑month earning cycle locks in a rate for that cycle. Purchasing just before or after your issue‑month cutoff can slightly affect the first six months of earnings. Over longer horizons, timing effects tend to smooth out, but knowing your personal reset months helps you anticipate changes in earnings.

Annual purchase limits

I Bonds can be purchased electronically through TreasuryDirect in any amount from $25 up to $10,000 per calendar year per Social Security Number or Employer Identification Number, to the penny. Paper I Bonds are available only via a federal tax refund (Form 8888) in set denominations and are capped at $5,000 per year per return. These electronic and paper limits are separate, so an individual can potentially acquire up to $15,000 in a year by combining both channels.

Limits apply separately to each legal entity. For example, an individual, a trust, and a business with its own EIN each have their own $10,000 electronic limit. Gifts purchased in TreasuryDirect count against the recipient’s annual limit when the gift is delivered to the recipient’s account. Payroll savings purchases are routed to TreasuryDirect and count toward your electronic limit for that calendar year.

Redemption and penalties

I Bonds must be held for at least 12 months; they cannot be cashed earlier except in rare, specially authorized circumstances. If you redeem within the first five years, you forfeit the last three months of interest as an early‑redemption penalty. After five years, there is no penalty. Interest is added to the principal every six months, so forfeiting three months of interest reduces only the most recent accrual, not earlier compounding.

Values update monthly, and you can redeem in electronic form for any whole‑cent amount of at least $25. Paper bonds can be redeemed in full denominations. The bonds stop earning interest at 30 years from issue, at which point they should be redeemed or exchanged to avoid idle funds earning no further interest.

Taxes and education rules

Interest on I Bonds is subject to federal income tax but is exempt from state and local income taxes. You can defer federal taxation until you redeem the bond or it matures, whichever comes first. Treasury issues Form 1099‑INT for the tax year in which interest is reported. Bond owners sometimes choose to report interest annually, but most defer until redemption for simplicity.

A special exclusion may apply if you use the proceeds for qualified higher‑education expenses under the Education Savings Bond Program. Eligibility depends on the owner’s age at purchase, filing status, timing of expenses in the same tax year as redemption, and modified adjusted gross income limits. If you qualify, you claim the exclusion using IRS Form 8815. Because income thresholds and rules can change, review current IRS guidance before relying on the exclusion.

Buying and account management

Electronic I Bonds are purchased and held at TreasuryDirect.gov under registrations such as individual ownership, with a beneficiary, or with a secondary owner. You can set up a linked minor account for a child or open an account for a trust or business using the appropriate TIN. Minimum electronic purchases are $25, and you can schedule purchases, set recurring contributions, and store undelivered gifts in a Gift Box until you’re ready to deliver them (subject to the recipient’s annual limit at delivery).

Paper I Bonds are available only through the federal tax‑refund process in fixed denominations. When redeemed, paper bonds can be cashed at many financial institutions or mailed to Treasury for processing. Keeping records of issue dates, registration, and expected reset months helps you plan around the 12‑month lockup, the five‑year penalty window, and the 30‑year final maturity.

In summary, Series I Savings Bonds tie earnings to inflation using a transparent formula that combines a life‑of‑bond fixed rate with a CPI‑based component. Clear purchase limits and straightforward redemption rules help you plan contributions and withdrawals over time. With federal tax deferral and state/local tax exemption on interest, they can play a conservative role in a diversified savings strategy focused on preserving purchasing power.