Series I Savings Bonds - An Alternative to CDs
Just about every week, I have a conversation with a client looking for an alternative for their near zero interest rate CD, savings, or money market account. Last week, I came across an article regarding Series I Bonds. Everyone is familiar with the Series EE Savings Bonds that our grandparents gave us for our birthday, but the Series I Bonds are different. The "I" stands for inflation and Series I savings bonds are a low-risk alternative to banking products. During their lifetime they earn interest and are protected from inflation. The Treasury sets the rate (based on inflation) on the first business day of May and November. The composite I Bond rate as of May is 3.54%.
The I Bond composite rate is high compared to today's CD rates from banks, but it's important to remember that the inflation rate on the I Bond changes every six months. So, even if future inflation numbers average close to the Fed's 2% target, that would result in a competitive return for I Bonds over the next couple of years.
For those looking for a safe inflation hedge, I Bonds are a good choice. The primary downside of I Bonds is the purchase limit. The maximum that an individual can purchase per year is $10,000 at TreasuryDirect and $5,000 in paper bonds purchased with an IRS tax refund.
Below is a summary of the I Bond features. More information is available at the Treasury Direct I Bond page:
Can't be redeemed within 12 months of issue date
Lose 3 months interest if redeemed within 5 years
Interest is composed of fixed and inflation-based rate
Fixed rate remains for life of bond
The combined rate will never be less than zero
Inflation-based rate changes every 6 months after issue date
New rates announced every six months on November and May 1st
Federal tax can be deferred on interest until bond is redeemed
Interest is exempt from state and local tax
Some or all interest is tax exempt when used for educational expenses
Maximum purchases per year and per social security number is $10,000 in TreasuryDirect and $5,000 in paper bonds purchased with IRS tax refunds
For more details about Series I Bonds, visit the TreasuryDirect website.