Financial Planning

Earn 3.54% With Series I Bonds

A savings or money market deposit account is best for quick cash, but I bonds can fit into a longer-term savings plan.

With interest rates on most savings accounts and certificates of deposit paying well under 1%, the 3.54% composite rate on newly issued Series I savings bonds is hard to ignore. The composite rate consists of a fixed rate, which is currently 0% on new bonds, and an inflation rate, which is based on the government’s consumer price index and adjusts every six months from the bond’s issue date. Rates on new bonds are set each May and November. The composite rate was 1.68% until May.

Kiplinger expects a 4.4% rise in overall prices this year as a reopening economy, government stimulus and shortages contribute to price increases. If inflation lessens down the road, a weak inflation rate combined with a 0% fixed rate could mean poor returns on your I bond. But “even if the total rate drops to zero in six months—which is highly unlikely—you will likely earn a higher return with 3.54% for six months and zero for the next six months than you would with other options,” says Chuck Bender, a certified financial planner in Baltimore. (If the inflation rate becomes negative because of deflation, an I bond’s composite rate does not go below 0%.)

You can’t redeem an I bond within the first year. If you cash it in before five years have passed, the penalty is three months’ worth of interest—considerably less severe than the early-withdrawal penalties on most five-year CDs. Even if you pay the penalty, “you will still likely be far ahead of where you’d be if you just earned the standard interest rate on your bank savings account,” says Matt Hylland, a financial planner in Cedar Rapids, Iowa. A savings account or money market deposit account is the best choice for money you may need to access immediately, such as an emergency fund, but I bonds can fit well into a longer-term savings stash.

Each year, you can purchase up to $10,000 in electronic I bonds at treasurydirect.gov, plus up to $5,000 in paper bonds with your federal tax refund. You don’t pay state or local income tax on the interest, and you can defer federal income tax until you redeem the bond or it reaches maturity after 30 years.

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