I-Bonds

Inflation-indexed Savings Bonds issued by the United States Treasury in eight denominations ranging from $50 to $10,000 with a 30-year maturity. Unlike other inflation-adjusted bonds, but like other savings bonds, the securities, which were introduced in 1998, offer special tax benefits. As long as investors hold their bonds, they may defer paying taxes on their earnings, which are automatically reinvested and added to the principal. Like other Treasury bonds, I-Bonds are exempt from state and local income taxes. If the bond is redeemed to pay for college tuition or other college fees, investors may exclude part or all of the income in calculating their taxes. The payout on the bonds is determined by two rates. A fixed rate, ranging from 3% to 3.5% when the bonds were first introduced, is set by the Treasury Department. The second rate, a rate of inflation, is determined every six months by the Bureau of Labor Statistics to reflect changes in a version of the Consumer Price Index. Some protection against deflation exists in that any decline in the Consumer Price Index (CPI) could eat into the fixed rate, but not affect the underlying principal. See also Inflation Indexed Securities; Treasury Inflation Protected Securities (Tips).