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While rising inflation has its obvious downsides – hello, exorbitant grocery bills – the rise in the prices of goods and services makes one investment all the more attractive: Series I savings bonds.
Also known as “I-Bonds,” these virtually risk-free investments already have a lot going for them: they’re backed by the US government, they don’t fall in value, they offer tax benefits, and—arguably most attractively—they currently pay more than 7% interest per year.
Even better, this already high yield is expected to increase even further thanks to inflation.
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What you need to know about I-Bonds
Experts are now predicting that I could offer bonds 9.6% annualized return in May, based on March CPI data released Tuesday, showing inflation up 8.5% year-on-year – but that’s an estimated figure.
I-Bonds benefit from this rise because they pay both a fixed rate of return, set by the US Treasury Department, and an inflation-adjusted variable rate of return, with the latter changing every six months based on the consumer price index. In other words, they can protect your cash from inflation.
Note that individuals cannot purchase I-Bonds through a brokerage account, only through the US Treasury Department website and there is a limit to how much you can invest. You can generally buy no more than $10,000 per year in I-bonds, plus an optional additional $5,000 if you file your tax return in paper bonds.
I-Bonds mature after 30 years, which means you can earn interest on them continuously for 30 years unless you redeem them first. While you can redeem this as early as one year after the initial purchase, if you pay out early, i.e. within five years, the interest income of the last three months will be forfeited. For tax benefits, you can delay reporting your interest until it is due or paid out.
What you should consider before boarding
Cashing in I-Bonds in less than five years means you’re missing out on the last three months’ interest, but the yield is so high that it’s probably still worth it compared to other savings vehicles high yield savings accounts and CDs.
However, it’s important to note that I-Bonds are generally viewed as long-term investments with a reliable return. Your money will be tied up in I-Bonds for at least a year. So if you’re looking for something more accessible in the near future – like within a year – consider a short-term CD like the 3-month BrioDirect High-Rate CD, or a 6-month CD like iGObanking High-Yield iGOcd®. Choose your CD duration based on how quickly you need the money. Another option is a top high-yield savings account like the Marcus by Goldman Sachs High Yield Online Savings or other major bank options like an American Express® High Yield Savings Account or a Barclays Online Savings Account.
Wealthy investors should also consider whether an I-Bond will have that much of an impact on their overall portfolio given the $10,000 cap. If this is a considerably small amount, there probably is no point in opening one.
Finally, if you want more liquidity and potentially higher returns (but also more risk), consider investing in stocks or index funds through a brokerage account such as Fidelity or TD Ameritrade.
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Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editors and has not been reviewed, approved, or otherwise endorsed by any third party.