Forget high-yield savings accounts and CDs. If you want a nearly risk-free way to grow your cash, Uncle Sam has an attractive offer.
The U.S. government announced a new 7.12% interest rate for Series I savings bonds from November 2021 through April 2022 — the second highest interest rate ever for these investments.
That’s big news because Series I bonds— also known as inflation bonds or I bonds — are fetching a much higher return than other conservative investments, like high-yield savings accounts and bank certificates of deposit (CDs).
For context, the best annual interest rate for a one-year CD is currently hovering around 0.65% to 0.75%, while the best five-year CDs only pay around 1.2% a year.
At 7.12%, these bonds offer a rate about 12 times higher than what you’d currently earn from the best savings accounts.
In fact, 7.12% is closer to the historical yearly average of the stock market — typically 10% — than current CD rates.
And since I bonds are backed by the full faith and credit of the U.S. government, your risk of losing money is basically zero. (Historically, the U.S. government has never defaulted on bonds.)
But before you rush to buy I bonds, there’s a few things you need to know.
What Are I Bonds and How Do They Work?
I bonds are meant to protect the purchasing power of your dollar against inflation.
I bond rates actually combine two different figures:
- A fixed rate of return, which remains the same throughout the life of the bond. (It’s currently at 0%.)
- A semiannual (twice a year) inflation rate that fluctuates based on changes in the Consumer Price Index.
Rising inflation triggered the new, higher I bond rate. Annual inflation rose by 4.4% in September — the fastest pace in over 30 years, according to a report from the U.S. Department of Commerce.
In fact, inflation grew so much this year, the government nearly doubled the variable rate on I bonds (it was set at 3.34% just six months ago).
While new buyers will enjoy 7.12% on these bonds for now, that rate can change after six months. It goes up or down, depending on national inflation.
Check out this chart from the U.S. Treasury to see how I bond rates have changed over time.
On May 1, 2022, The Treasury will calculate a new inflation rate. If inflation continues to heat up, you could get more interest on your bonds. If it cools off, your variable rate declines.
You won’t lose money if the interest rate goes down — you just won’t earn as much. (The I bond inflation rate in May 2015, for example, was just 0.24%.)
However, new I bond buyers will miss out on the fixed rate enjoyed by purchasers in years past.
That’s because the current fixed rate for I bonds is absolutely nothing.
That’s right: The fixed rate has been flatlining at 0% since May 2020.
Since this half of the bond rate is locked in, your 0% fixed rate won’t increase over time. Instead, all the money you make from an I bond purchased today will be interest earned from the inflation-based semiannual rate.
Must-Know Facts About I Bonds
I bonds might be nearly risk-free, but they still come with rules and restrictions.
First, these are 30-year bonds. Your cash isn’t locked up for the entire 30 years but you absolutely can’t access your money for at least 12 months. The government won’t allow you to cash out an I bond any sooner.
After a year, you can cash it in, but you’ll lose three months worth of interest if you cash out less than five years after purchase.
I Bond Fast Facts
- I bonds are sold at face value (no fees, sales tax, etc.)
- They earn interest monthly that is compounded twice a year.
- The bond matures (stops earning interest) after 30 years.
- You have to wait at least one year to cash in I bonds.
- You’ll lose three months of interest payments if you cash in a bond you’ve owned for less than five years.
- Minimum investment is $25.
- Maximum digital I bond investment is $10,000 per year.
- The value of your I bond will never drop below what you paid for it.
- It’s exempt from state and municipal taxes.
You can buy up to $10,000 in digital I bonds per person per year.
You can also buy up to $5,000 in paper I bonds per year. The only way to get paper bonds is at tax time with your federal refund.
When it comes to taxes, I bonds are exempt at the local and state level.
You can choose to either pay federal tax on the bond each year or defer tax on the interest until the bond is redeemed.
You may be able to forgo paying federal tax altogether by using the bonds for higher education costs. Your adjusted gross income needs to be under $83,200 for a single filer in 2021 to qualify for this education tax perk, or $124,800 for couples.
How to Purchase I Bonds
The fastest and easiest way to purchase I bonds is on the TreasuryDirect website. It’s a free and secure platform where you can view all your account information, including pending transactions.
You can also give I bonds as a gift.
Another option is buying I bonds at tax time with your refund.
You can tell your tax preparer you want to buy savings bonds with part or all of your refund. Or, if you’re using tax software, the computer will guide you through the process.
You can buy I bonds in increments of $50 this way. You don’t need to put your entire refund in bonds — you can earmark just part of it.
FYI: You can’t resell I bonds and you must cash them out directly with the U.S. government. Also, only U.S. citizens, residents and employees can purchase these bonds.
The Treasury also offers a payroll savings option, which lets you purchase electronic savings bonds with money deducted from your paycheck.
Who Are I Bonds Right For?
There’s a few ways investors can benefit from purchasing I bonds at the current 7.12% rate.
Scenarios When It Makes Sense to Buy I Bonds
- You’re a conservative investor worried about inflation and stock market fluctuations.
- You want to diversify your stock-heavy portfolio with a safe investment.
- You’re nearing retirement and are shifting your portfolio toward bonds.
- You want to save money for a child’s future college expenses.
- You’re saving up for a big purchase that’s at least a year away, and want to earn a little interest on your cash in the meantime.
Because I bonds can’t be cashed in for a year, it’s important to keep enough money in your cash emergency fund to cover immediate expenses.
I bonds won’t make you rich. But for everyday working Americans, these investments offer a safe way to grow your cash and hedge against inflation.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for Codetic.