These days, a yield north of 4% on a safe place to park your cash is a pretty good deal. So Series I savings bonds, which are offering a 4.26% composite rate on newly issued bonds, are worth a look. And because their interest rate adjusts based on inflation, they’re especially useful if you want to hedge against rising prices. In April, consumer prices rose at an annual rate of 3.8%, the highest level in nearly three years.
At TreasuryDirect.gov, you can purchase I bonds for a minimum of $25, with an annual limit of $10,000 per person. Backed by the full faith and credit of the U.S. government, I bonds offer an interest rate that has two components: A fixed rate that lasts the life of the bond and an inflation rate that resets every six months based on changes in the consumer price index. Together, they form the composite rate.
Each May 1 and November 1, the Treasury Department sets a new fixed rate and inflation rate that apply to bonds issued in the following six months. (The inflation rate also applies to older bonds when they reach their six-month adjustment date.) The 4.26% composite rate for I bonds purchased May through October of this year includes a 0.9% fixed rate. I bonds earn interest monthly, and interest is compounded (in other words, added to the principal) semiannually.
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A 4.26% yield is better than the rate you can get on most other low-risk places to put your money, such as savings accounts and money market deposit accounts. But you can’t cash out an I bond until you’ve held it for 12 months. And if you redeem it within five years, you forfeit the last three months of interest. So these bonds are best used for longer-term savings.
An I bond reaches maturity after 30 years, when it stops collecting interest. The interest earnings are exempt from state and local income tax, although you usually owe federal income tax. You can pay tax on the interest each year or defer it until you redeem your bonds. Although most people choose the latter, reporting the interest every year can be a smart choice if you’d rather avoid one large tax bill down the road.
What to do with older bonds
If you bought I bonds in 2022, when surging inflation resulted in a record-high composite rate of 9.62% on bonds purchased from May through October of that year, you may be thinking about how long to hold on to them. They have a 0% fixed rate, and their composite rate for the six-month earning period starting between May and October of this year is 3.34%.
If you don’t need the cash right away, there’s no rush to redeem the bonds, says David Enna, founder of Tipswatch.com, a website that tracks I bonds. Although you could cash them in now and use the money to buy new I bonds with a higher fixed rate, consider whether it’s worth the early-redemption penalty of three months’ interest, he says. And even after the five-year mark, when the penalty no longer applies, keeping the bonds until they mature isn’t a bad idea. They’ll continue to benefit from compounding interest.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.