The landscape · Own accounts
I bonds and Treasury bills through TreasuryDirect
TreasuryDirect is the government's own website where a person can buy Series I savings bonds, which pay a rate tied to inflation, and Treasury bills, which are short term loans to the government sold at a discount.
Who this exists for. This exists for a person holding cash they do not need for a while, who wants to know what the Treasury sells directly to individuals. Ticks that show it: I hold investments outside retirement accounts; I rent; I own my home; My household income is well above average.
How it works
An I bond earns a composite rate made of a fixed rate set when the bond is bought and an inflation rate that resets every six months, and interest is added to the bond rather than paid out. A person can buy up to this year's official i bond annual purchase limit (not yet verified here; see the official source below) electronically per year per Social Security number. The bond cannot be cashed in the first twelve months, and cashing it before five years forfeits the last three months of interest. Interest is taxed by the federal government when the bond is cashed or matures, but it is exempt from state and local income tax. A Treasury bill is sold for less than its face value and pays the face value at maturity, in terms from four to fifty two weeks, and the difference is interest, also exempt from state tax.
What it gives
Both are free of state and local income tax, which matters in a high tax state.
An I bond's inflation rate protects the purchasing power of cash during a period of rising prices.
Treasury bills can be set to reinvest automatically at each maturity.
What it costs, or where the catch is
An I bond is locked for twelve months and loses three months of interest if cashed within five years.
The yearly I bond purchase cap is small next to a large cash balance.
TreasuryDirect has an older interface and transfers to a brokerage are not possible for I bonds.
A worked example
Ravi buys $5,000 of I bonds in May. The composite rate for his first six months is 4.3 percent a year, so the bond earns about $5,000 times 0.043 divided by 2, which is about $107 in that half year. He cashes it after exactly fourteen months, so he gives up the last three months of interest. He lives in a state with a 5 percent income tax, so the interest he keeps avoids about $5 of state tax for every $100 earned.
Where it goes wrong
The common miss is buying I bonds with money needed inside a year, since the bond cannot be cashed at all during the first twelve months.
Who confirms it for you
Nobody has to; it is arithmetic you can check yourself with the numbers above.
The official source
TreasuryDirect: I bonds. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about I bonds and Treasury bills through TreasuryDirect
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Nearby doors
- After tax contributions and the mega backdoor Roth
This exists for a worker whose plan allows after tax contributions above the deferral cap and allows them to be moved into a Roth account.
- The employee stock purchase plan discount
This exists for a worker whose employer offers an employee stock purchase plan that sells company shares at a discount through payroll.
- Nonqualified deferred compensation
This exists for higher earners, usually executives and senior staff, whose employer offers a plan to defer salary or bonus beyond what a 401(k) allows.
- The commuter benefit
This exists for a worker whose employer offers transit passes or parking paid from pay before tax.
- The traditional IRA and the deduction phase out
This exists for anyone with earned income who opens an IRA on their own, and especially for a worker who also has a plan at work, since that changes whether the contribution is deductible.
- The Roth IRA and its income phase out
This exists for anyone with earned income below the Roth income lines who wants an account where qualified withdrawals come out tax free.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.