I bonds are subject to federal income tax on the interest earned. However, they are exempt from state and local taxes. Federal tax can be deferred until the bond is redeemed or matures, up to 30 years. Interest can be reported annually or paid when the bond is cashed in. Interest may be federal tax-free if used for qualified higher education expenses.
What tax advantages do Series EE and Series I savings bonds offer? You don't have to pay state or local income tax on them. You can choose not to pay federal income tax on them until you cash them or they mature, whichever is first.
You'll likely want to time your cash-out for three months after your I-Bond's reset date so that the three months' interest you lose are of the new lower rate, not the higher rate you were happier with. To accomplish that, you should hold your I-Bond for at least 15 months.
If you buy a bond when it is issued and hold it until maturity, you generally won't have a capital gain or loss. However, if you sell the bond before its maturity date for more than you paid for it, you'll typically have a capital gain. If you sell it for less than you paid for it, you'll usually have a capital loss.
Yes, I-bonds have several downsides, including liquidity restrictions (must hold 1 year, 3-month interest penalty before 5 years), low investment limits ($10k electronic, plus $5k paper via tax refund), variable rates that can drop with deflation, and taxation (federal, but exempt from state/local). They also aren't for everyone as they can't be held in retirement accounts, lack market liquidity, and may not beat stocks long-term.
The current I-bond rate, valid for bonds issued November 1, 2025, through April 30, 2026, is 4.03%. That includes a fixed rate of 0.90%. To put that in context, the best high-yield savings accounts and the best CD rates are giving returns around 4.2%.
You must hold the bond for at least 12 months—and if you sell it before five years, you forfeit three months' worth of interest.
The 20% rule for capital gains refers to the highest federal tax rate for long-term capital gains, applying to higher income brackets when you sell investments (stocks, real estate) held for over a year, with lower rates of 0% and 15% for lower incomes, and even higher rates for special assets like collectibles. This rate kicks in for single filers earning over approximately $492,300 (2024) or $533,401 (2025), and higher for joint filers, making holding assets over a year a key tax strategy.
Q. What is the 5% tax deferred allowance? A. This is a rule in tax law which allows investors to withdraw up to 5% of their investment into a bond, each policy year, without incurring an immediate tax charge.
Warren Buffett views bonds as a safe haven for cash, often recommending a 90/10 portfolio (90% S&P 500 index fund, 10% short-term government bonds) for average investors, while Berkshire Hathaway itself holds large amounts of U.S. Treasury bills for capital preservation and to earn competitive yields, especially when stocks are expensive. He favors short-term Treasuries (T-bills) due to low interest rate risk and high liquidity, using them to park cash while waiting for better stock opportunities, rather than as a primary growth engine.
The composite rate for I bonds issued from November 2025 through April 2026 is 4.03%.
If a financial institution pays the bond, you get a 1099-INT from that financial institution either soon after you cash your bond or by January 31 of the following year. If your bonds are in your TreasuryDirect account, your 1099-INT is available in your account by January 31 of the following year.
You should redeem I-Bonds after holding them for at least one year, ideally on the first business day of the month, and strategically to minimize the penalty of losing the last three months' interest if cashing within five years, often by waiting until you've earned a few months of a lower interest rate before cashing out to reduce the penalty's impact. After five years, there's no penalty, and bonds mature after 30 years, but cashing just after the month begins maximizes earned interest before the penalty or maturity.
Tax exemption: The interest on Tax-Free Bonds is exempt from income tax under Section 10(15) without limit. Maturity: These bonds have varying maturity periods between 10 and 15 years. Investment cap: There is no upper limit for investing in these bonds.
On a $100,000 capital gain, you'll likely pay 15% for long-term gains, resulting in about $15,000 in federal tax (plus potential state tax), but it could be 0% or 20% depending on your total taxable income and filing status, while short-term gains are taxed as ordinary income (potentially 22-24%).
Your $500,000 can give you about $20,000 each year using the 4% rule, and it could last over 30 years. The Bureau of Labor Statistics shows retirees spend around $54,000 yearly. Smart investments can make your savings last longer.
Pros: I bonds have a high interest rate during inflationary periods, are low-risk, and help protect against inflation. Cons: Rates are variable, a lockup period and early withdrawal penalty apply, and there's a limit to how much you can invest.
Taxes when you are the bond owner
They can pay federal income tax each year on the interest earned or defer the tax bill to the end. Most people choose the latter. They report the interest income on their Form 1040 for the year the bonds mature (generally, 30 years) or when they're cashed in, whichever comes first.
I bonds' variable rate aligns with CPI, protecting your savings from eroding due to rising prices. For retirees, this means I bonds can help maintain the actual value of their investments over time, safeguarding against the effects of inflation and ensuring their financial security in retirement.