You may have heard about Series I Savings Bonds (sometimes called I Bonds) in the news lately. And if you haven’t, keep reading and see if you should be using them!

How They Work

• Series I Savings Bonds are issued by the federal government and pay interest based on two factors:
  • A fixed rate – currently 0%; plus
  • A rate based on current inflation

The second piece is updated based on current inflation levels every May and November. The rate you see when you first purchase the bond is locked in for 6 months only.

After that, it adjusts to the most recently issued rate for the next 6 months. This chart shows what these interest rates have been historically.

• There is a limit to how much cash you can put into I Bonds. Each person can buy $10,000 per year, and you can throw in an extra $5,000 if you use your tax refund to purchase some as well.

• The bonds are purchased directly from the government through the Treasury Direct website. Fair warning – it’s not the easiest site to navigate, and you need to create separate accounts for you and your spouse.

The Pros

1. Buying I Bonds essentially guarantees that your cash will keep pace with inflation. This is a great alternative to the almost non-existent rate of interest you earn in a checking or savings account.
2. Since these bonds are backed by the federal government, there is little to no chance you would ever lose the money you put in.
3. Tax benefits. You pay no state tax on the interest earned (you still pay federal tax, but you can choose to pay as the interest accrues, or only when you take the money out). And if you use the funds for education expenses, the interest earned can be tax free.

The Cons

1. You get no “real” return when the fixed rate is 0. Real return means earnings above and beyond the rate of inflation. Over the long term, stocks are still the best way to beat inflation. 
2. These bonds can’t be redeemed within 1 year of their purchase. So if there is any chance you could need your cash within a year, I Bonds would not be the place to put it.
3. You forfeit the last 3 months of interest if you redeem the bonds within 5 years. You could still end up earning a better rate of interest than a savings account, but it’s something to be aware of.
4. The rate is variable. If inflation quickly returned to more normal levels, the rates on these bonds would drop significantly after the first 6 months.

Should You Buy I Bonds?

Let’s talk first about who should not buy Series I Savings Bonds. 

• If you have cash that you have set aside as an emergency fund, you shouldn’t be putting that money into I Bonds. These bonds are completely inaccessible for one year, which is not helpful if you have an unexpected need for cash pop up in that timeframe.
• If you are looking to invest for long term growth, I Bonds are not for you. The stock market is the best place to invest for long term returns above and beyond inflation.

So when do these bonds make sense?

• If you are saving for a short to intermediate term goal (that is also greater than 1 year out), I Bonds could be ideal. For example, maybe you’re saving for a down payment on a house or car in a couple years.

Short term savings (for goals in the 1-5 year timeframe) should not be invested aggressively, and as we talked about, bank accounts and even other types of bonds currently offer very little in the way of return. So I Bonds could (at least temporarily) fill the need for return with little to no risk.

While not for everyone, I Bonds offer an attractive rate of return right now. And they could be worth a look if they line up with your financial goals.

Joe Calvetti is a CPA and the founder of Still River Financial Planning, a comprehensive, fee-only financial planning firm that specializes in working with young families and professionals. Click here to learn more about how we work with clients.

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Disclaimer: The information provided above is for educational purposes only and should not be considered financial, legal, or tax advice. You should consult with a professional for advice specific to your situation.