Everyone is looking for a hedge on inflation right now. A great way to do it would be to find a surefire, almost “no-risk” investment that will pay you big interest, say 7% plus. But where do you get that these days? Do you have a magic lamp that you can rub? What is the best investment for your money right now?
How about Series I U.S. Savings bonds, aka I bonds? Yes, I have touted them before, but now is an absolutely great time to consider them! Why? because this is the best investment you can get at the moment!
I Bonds Are Having a Moment
Long championed by financial nerds as one of the best ways to hedge against inflation, I bonds are finally getting mainstream attention, thanks to interest rates that are now far outpacing similar safe investments.
The reason these government savings bonds offer such good protection against inflation is by design, the “I” stands for inflation protection. As prices for consumer goods go up, so do the I bond interest rates. And as of this week, I bonds are paying out the second highest rate in their history. Right now that is a tremendous 7.12% return on your purchase of a bond. That number is nearly twelve times the rate you could earn from the country’s best savings accounts.
The current I bond interest rate applies to bonds issued between November 2021 and April 2022. On May 1, 2022, the U.S. Treasury will recalculate a new inflation rate, based on the latest Consumer Price Index which of course we do not know. Experts have said that inflation is going to be here for a while, well into 2022, so the rate may even go up next May. We just don’t know.
What Does This All Mean for You?
Some economists say that I bonds are America’s best-kept investing secret due to their relative obscurity. The best way to think about I bonds is as an inflation-protected savings account backed by the full faith and credit of the U.S. government.
There is no investment safer than a U.S. Savings bond, and these I bonds right now can be utilized by everyone as a hedge against inflation. Historically, the U.S. government has never defaulted on bonds, not even during the American Civil War.
What to Know Before Buying I Bonds
Even though they’re a safe investment and currently paying out impressive interest, savings bonds may not make sense for every type of saving goal.
Perhaps the biggest caveat of I bonds is that they typically can’t be cashed out for one year, similar to certificates of deposit (CDs)*.
*By the way, the current interest rates for CDs are no comparison to I bonds. Even the best 12-month CD rates are currently less than 1% APY, a far cry from I bonds’ 7.12% annualized rate. And CDs typically have minimum deposit requirements of hundreds, if not thousands, of dollars.
That means that I bonds aren’t the best place to stash savings that you might need immediate access to, though the Treasury can make exceptions to that one-year cash out rule based on financial hardship. You have to contact the Treasury directly to explain your situation in case of you need to do that.
Similarly, bonds cashed out within a five-year span of their purchase date have a slight drawback: You’ll forgo the last three months of interest. For example, if you cash out an I bond 20 months after purchasing it, you would receive the entire purchase price plus 17 months of interest. After five years, you can cash them out whenever you want or let them mature for 30 years, the maximum interest-accruing length of an I bond.
Another caveat is the annual purchase limit is $15,000, though that helps limit the benefits of I bonds to lower and middle income earners. The biggest beneficiaries of these bonds are people in the middle class. It’s one of the few government programs that doesn’t favor the wealthy.
How I Bond Interest Works
The way interest works for I bonds is also worth noting before you purchase one. There are two different rates, and your bond’s interest is a combination of these two rates.
One is called a fixed rate and does not change over the life of your bond. The Treasury sets new fixed rates each May and November, but those fixed rates only apply to new bonds purchased within that timeframe. The fixed rate has sat at zero since May 2020.
The other rate is the inflation rate. It does change over the life of your bond with new rates set every six months. Right now the annualized interest rate is 7.12%, and you can lock in that rate for six months as you purchase an I bond at any time before May 2022. If the rate just holds for one year and you invested the max of $15,000 dollars, after one year you would have earned $1,068 dollars in interest!
Folks who purchased I bonds back when the fixed rate was above zero are particularly benefitting from the new 7.12% inflation rate. For example, on May 1, 2000, the Treasury set the fixed rate at 3.6%. People who still own those bonds are now receiving an interest rate of 10.85% on them.
Finally, keep in mind that series I bonds work differently from the other type of government savings bonds. Those bonds, series EE bonds, have a separate interest rate and will double in face value if you keep them for 20 years.
Both these types of savings bonds are different from the bonds in any mutual funds you might buy or own.
The Other Perks of I Bonds
Aside from being one of the safest investments out there, consider these additional unique perks:
- There are no state or local taxes on I bonds. They aren’t taxable at a state or local level. When you cash them out, you will pay only federal taxes on the interest you’ve earned. You may instead opt to pay the federal taxes as you go each year.
- Federal tax is waived for education purposes. Aside from exemption from state and local taxes on I bond interest, folks who are using the I bond funds to pay for higher education may also be exempt from federal taxes, too, so long as they earn less than the income limits set by the IRS each year, currently $97,350 for single filers.
- Their value can’t deteriorate and can never go below zero. Because of how inflation rates are factored in, the real value of your I bond will never drop below what you paid for it. No other savings account or stock can guarantee that its value will keep up with inflation.
How to Buy I Bonds
Electronic I bonds are available for immediate purchase via the Treasury Direct, a government website.
You will need to open an account and register the I bonds which determines who owns them and can cash them. The I bonds are available at any denomination, and you can purchase a total of $10,000 in electronic bonds per year.
Paper I bonds work a little differently. These can only be purchased using your federal income tax refund. Paper bonds have an annual limit of $5,000 per year, and they can only be purchased in the following five denominations: $50, $100, $200, $500, and $1,000. The Treasury says these purchasing limits are separate, meaning you can buy a grand total of $15,000 per year.
It isn’t often that I can recommend an absolutely safe way to invest and beat the inflation rate with almost no work on your part. This is the way! To capitalize on this sky-high interest rate, the bonds must be purchased between now and the end of April 2022. The sooner you can do it, the better off you will be.
I still have several I bonds I bought back in 2001 and right now I am earning over 10% on them…wow!
Of course you need money to make this money and isn’t that always the way? It just reinforces the fact that saving your money opens doors for you. If you have been saving any money and have seen inflation eating at it, this may be the way to turn that around. Will you?