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I bonds: Inflation's bright side

For at least five years, one of the topic questions asked by clients has been something like this: "Isn't there someplace I can park my cash and earn at least 4% with no risk?"

Until recently, the truthful answer has been no. At a time of record-low interest rates, there was no free lunch. Earning more than 1 percent or so required taking some degree of investment risk.

That has changed for at least a little while now thanks to the recent spike in inflation. U.S. government Series I bonds currently yield 7.12%, an eye-popping figure compared to the 0.50% you might earn on an FDIC-insured bank savings account.

I bonds are a form of U.S. savings bonds issued by the U.S Treasury that are designed to offer a guaranteed rate of return that keeps up with inflation. If you are sitting on some excess cash that you do not expect to need within the next 12 months, you may want to consider an I bonds purchase through the federal government's Treasury Direct web site.

Before thinking Series I bonds are the answer to all your savings needs, there are several major caveats to keep in mind:

  • The 7.12% rate currently being paid is only good for the first six months after purchase for bonds bought before the end of April. In May, a new rate will be set that could be higher or lower than the current rate, depending upon inflation at the time.
  • Purchases of electronic I bonds through the Treasury Direct web site are limited to $10,000 per year per person. A married couple together can buy $20,000 worth but each spouse will require their own Treasury Direct account. An extra $5,000 in paper I bonds can be purchased using a federal tax refund.
  • I bonds cannot be cashed in for 12 month after purchase, meaning you should not buy any with cash you expect to need during that time period.  Also, you will lose the last three months of interest if the bonds are cashed in less than five years after purchase.

Returns from savings bonds are exempt from both local and state taxes, and may be tax exempt if they are to be used for higher education purposes.

For more details on purchasing I bonds, visit this Treasury Direct page

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