An I Bond is a U.S. Treasury savings bond whose interest rate is built to move with inflation: half of its rate resets every six months based on the change in consumer prices, so the bond pays more when inflation runs hot and less when it cools. Individuals buy them directly from the government at TreasuryDirect.gov, not through a bank or brokerage, and the principal itself never falls, only the rate paid on it changes.
The composite rate formula
Every I Bond’s interest rate is a composite of two pieces, combined the same way for every bond:
Composite rate = fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)
The fixed rate is set by the Treasury on the day a bond is issued and never changes for the life of that bond, up to 30 years. The semiannual inflation rate is the same for every I Bond outstanding, regardless of when it was purchased, and it resets every May 1 and November 1 based on the change in CPI-U (the same all-items index this calculator uses, but not seasonally adjusted) over the preceding six months. The rate announced each November reflects the March-to-September change; the rate announced each May reflects the September-to-March change. Because the inflation half resets twice a year, an I Bond’s total rate can look very different a year after purchase than it did on the day it was bought, even though the fixed-rate half never moves.
One design detail matters more than it looks: the composite rate has a floor of zero. If the inflation component were ever negative enough to push the formula below zero, the rate would be set to zero rather than negative, so an I Bond can never lose nominal value the way a bond with a true negative yield could.
The 2022 record, and what followed
The clearest illustration of the formula at work is also the most extreme one on record. For bonds issued from May through October 2022, the fixed rate was 0% and the semiannual inflation component alone produced a composite rate of 9.62%, the highest I Bonds have ever paid since the program started in 1998. That rate was a direct pass-through of why inflation was so high in 2022: CPI-U had been climbing sharply through the summer, and the formula has no discretion, whatever the six-month CPI-U change works out to be, that’s the rate.
By the following reset, the picture had already shifted: as CPI-U growth slowed month to month, the inflation half of the formula came down with it, while the Treasury raised the fixed-rate half from 0% to reflect improving conditions elsewhere in the bond market. That trade, a lower inflation component offset partly by a higher fixed component, is the normal pattern once an inflation spike passes its peak. Because both halves reset independently, the two can move in opposite directions at the same time, which is exactly what happened through 2023.
What the rules actually let you buy
I Bonds are capped in a way most savings products aren’t:
- $10,000 per person per calendar year, bought electronically through a TreasuryDirect account.
- An additional $5,000 in paper I Bonds, but only by using part of a federal income tax refund to buy them, a separate allowance from the electronic limit.
- A 12-month minimum hold. The bond cannot be redeemed at all before 12 months have passed, for any reason.
- A 3-month interest penalty for cashing in between year one and year five: redeem an I Bond at month 18, for example, and the last three months of interest are forfeited.
- No penalty after 5 years. From the five-year mark until the bond matures at 30 years, it can be redeemed at full accrued value at any time.
Those caps are why I Bonds work as a place for money you can set aside for at least a year, not as a substitute for an emergency fund that might need to be touched next month. How inflation erodes cash savings covers the problem I Bonds exist to solve; this is one of the two instruments the Treasury built specifically to solve it, alongside TIPS, which adjust the same way but trade on the open market instead of being capped and held to maturity.
The tax treatment
Interest on I Bonds is exempt from state and local income tax, which matters most in high-tax states, and federal tax on that interest can be deferred all the way until the bond is cashed or matures, whichever comes first, rather than paid annually the way a regular savings account’s interest is. Under the Education Savings Bond Program, the interest can be excluded from federal tax entirely if the proceeds pay for qualified higher-education expenses in the year of redemption, subject to income limits that phase the exclusion out for higher earners. None of that makes I Bonds a tax shelter; it makes the after-tax return closer to the stated rate than a taxable account earning the same nominal yield.
Where I Bonds fit and where they don’t
I Bonds solve a specific problem: protecting a bounded amount of cash, money not needed for at least a year, from losing purchasing power to inflation, without taking on market risk. They do that job well within their limits. What they don’t do is scale: a household trying to protect $100,000 in savings can only put $10,000 to $15,000 a year into I Bonds per person, so the instrument caps out fast for anyone with real savings to protect. They also don’t compete with equities or even ordinary high-yield savings accounts when inflation is low and interest rates on competing products are high, since the fixed-rate half of the formula, not the inflation half, is what decides whether an I Bond beats a plain savings account in calmer years. The rate that matters when deciding whether to buy is always the current one posted at TreasuryDirect, checked against the current inflation rate, not the record rate from 2022.