Freaking out over inflation?
If you want a nearly risk-free way to grow your cash, Uncle Sam has an attractive offer for you.
The U.S. government announced a new eye-popping 9.62% interest rate for Series I savings bonds now through October 2022 — the highest interest rate ever for these investments.
Series I bonds — also known as inflation bonds or I bonds — are the only inflation-protected security sold by the Treasury Department.
With inflation at a 40-year high, there’s literally never been a better time to buy I bonds.
At 9.62%, I bonds are not only outpacing inflation, they’re earning more than the stock market so far this year — and even more than bitcoin. (The stock market is down 13.8% in 2022 and bitcoin is down 18.5%).
At 9.62%, these bonds offer a rate about 13 times higher than what you’d currently earn from high-yield savings accounts.
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 are a few things you need to know.
What Are I Bonds and How Do They Work?
I bonds are issued by the U.S. government and they can be purchased at TreasuryDirect.gov.
The interest rate on I bonds adjusts twice a year (in May and November) based on changes in the Consumer Price Index.
I bond rates actually combine two different figures:
A semiannual (twice a year) inflation rate that fluctuates based on changes in the Consumer Price Index.
A fixed rate of return, which remains the same throughout the life of the bond. (It’s currently at 0%.)
In April 2022, inflation increased 8.5% year-over-year, the biggest surge in more than 40 years. As inflation keeps rising, so does the variable rate on I bonds:
May 2021: 3.34%
November 2021: 7.12%
May 2022: 9.62%
While new buyers will enjoy 9.62% 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 November 1, 2022, The Treasury will calculate a new variable rate. If inflation continues to heat up, you could get more interest on your I bonds. If it cools off, your variable rate declines.
But 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%.)
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 0% — where it’s been 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.
Fight rising inflation with these 12 savvy tips.
Must-Know Facts About I Bonds
While I bonds are virtually risk-free, they still come with rules and restrictions.
First, these are 30-year bonds. Your cash isn’t locked up for three decades 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 person, 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 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.
Speaking of taxes, you can choose to either pay federal income 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 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 are a few ways investors can benefit from purchasing I bonds at the current 9.62% rate.
Scenarios When It Makes Sense to Buy I Bonds
You’re 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 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 The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.