Are Series I Savings Bonds A Good Investment?

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Series EE BondsIt doesn’t take a financial genius to notice that it’s tough being a responsible saver these days. Interest rates are low, and have been for a while, that it seems as though there isn’t much difference, outside of FDIC insurance, between opening a CD and stuffing the money in your mattress. The term high yield savings account is comedic… since when was 1.11 of anything considered high?

There are, however, a few options out there for savers with more flexibility in their finances. While the national debt has seemed to take hold in our political discussions, it hasn’t been as prominent in our financial discussions. Treasury debt, such as bonds and bills, has never been a sexy pick for main street savers. It’s about time we gave them a serious look as an option and my favorite of the group is the Series I savings bond.

I won’t go into the nuts and bolts of the bond, you can read about that here (note that the article is very old, so any figures are out of date but the mechanics are the same), but here are the reasons why I like it.

Attractive Interest Rates

Series I Bonds currently yield 4.60% APY through October 31st, when the inflation portion of the interest rate will be adjusted based on the CPI-U. As you may remember, Series I bonds have a fixed rate and an inflation rate. The fixed rate is set for the life of the bond whereas the inflation portion will adjust based on actual official inflation rates (you can argue whether or not CPI-U is an accurate gauge of interest, but that’s a different discussion).

Compared to interest rates of comparable investments, like savings accounts and certificates of deposit, a 4.60% rate is spectacular. It’s comparable to current reward checking accounts, minus the hassle.

There is a downside to the rate. You cannot redeem your bond prior to one year and if you redeem it before five years, you surrender 3 months of actual interest (what you earned the preceding three months).

Low Entry Point

If you buy a paper bond, the minimum investment is $50 and the increments are in sizable steps ($50, $75, $100, $200, $500, $1,000, and $5,000). If you buy an electronic bond through Treasury Direct, you can start with as little as $25 and move in penny increments. I find that going through Treasury Direct, despite it’s somewhat antiquated security measures, is the best option

Favorable Tax Treatment

Unlike interest earned on deposit accounts, like savings accounts and CDs, interest from this Treasury bond is exempt from State or “political subdivision of a State” (counties, cities, etc.), with the exception of estate/inheritance taxes. So it is subject to federal income taxes, but not State and “smaller.” You can exclude these earnings from federal taxes if they are used to finance education.

Finally, there is a limit to how much you can purchase each calendar year, though that limit is fairly high for most savers. The limit is $5,000 in electronic bonds through Treasury Direct and $5,000 in paper bonds. If you do opt for paper bonds, I highly recommend converting them to electronic bonds because it makes them easier to manage.

(Photo: karen_d)

{ 12 comments, please add your thoughts now! }

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12 Responses to “Are Series I Savings Bonds A Good Investment?”

  1. PK says:

    Would you please comment on whether or not using I Bonds for a portion of my EFund would be a good idea?

    • JQ says:

      I am also interested in your viewpoint on this same idea…

      Any disadvantages to selecting an I-Bond instead of a Bank CD?

      • Jim says:

        With bank CDs, you can pick your maturity and you still have the option of redeeming early. You can’t pick your maturity with an I-Bbond nor can you redeem it earlier than a year.

        • JQ says:

          Thanks, Jim!

          As PK questions above — would you recommend placing a portion of an Emergency Fund into I-Bonds [versus another liquid vehicle]?

          The high 4.60% APY is very appealing for storing some (semi) short-term cash!

          • Jim says:

            I think CDs are the best option for an emergency fund because you can withdraw it anytime you want. With an I-Bond, you’re forced to hold it for at least a year.

            One option that might make sense is laddering it. So the next time you go to roll over a CD, consider buying an I-Bond instead. The one-year time limit starts drawing down (without you having to deal with the hassle of renewing it once it matures) so it’s like a CD in that sense (but you always have a penalty). It’s an interesting question, I’ll have to give it some thought and make it into a post. Thanks JQ!

          • PK says:

            I can definitely see it as a part of a laddering scheme. Currently I have a long term CD with Ally and didn’t ladder the funds because I’d still be ahead overall after 90 days in the CD even with the penalty taken into account.
            With this yield beating the CD by 1.65%, I wonder where the risk goes away taking the penalty into account?

  2. I know diversification is important, but aren’t these mostly for people who are looking to preserve wealth rather than build it?

    Also, I’d like to know how much faith you have in the official inflation numbers, given that China announced last week that they think our currency is…well, not worthless, but not worth enough to justify it being the de facto world currency.

  3. skylog says:

    i have been a semi-regular purchaser if iBonds for years. i make sure to “bump up” my purchases when the rates are slightly better. sadly, the days of “larger” returns have been few and few between the past few years, but i still like this option for several reasons.

    that said, the security options on the web site are, well, they are safe…but certainly not pleasant.

  4. I-Bonds are the perfect investment for what I call 2nd tier Emergency Funds. These are funds I hope to never have to use and are in excess of liquid emergency funds I would use first.

    I have built a nice secondary emergency funds over the last 10 years. This has several advatages.
    1. It’s a little harder to get to. (I don’t really want to touch this money)
    2. My emergency funds maintain their buying power since the rate is tied to inflation.
    3. My emergency funds are safe.

    • Patrick says:

      I agree completely. I have been converting my cash emergency fund over the last few years into Ibonds (taking into account that new purchases are unavailable for emergency use for 12 months). I will continue to reduce my “1st tier” as much as possible – there is no point watching it inflate away when there is a safe and pretty much liquid alternative.

  5. Fred says:

    Why is it that the experts who write about I-bonds always talk about the current 6 month rate without considering the preceding 6 month rate? Since I-bonds have two very different 6 months rates each year, the only comparison figure that makes any sense would be to average the two most recent 6 month rates. Otherwise, the writer is always either raving about a misleading high six month rate (like Mr. Wang here) or disparaging a misleading low six month rate.

  6. Sadie says:

    I disagree with opting for paper bonds vs electronic bonds though own both.

    While it may make it easier for purchaser to manage, there seem to be too many variables:
    – Paper bonds stored in safe deposit box where someone may locate after death/fire?
    – Gaining access to ‘unknown’ electronic bonds may be a future issue for estate administrator if not clearly identified in will or other document.

    -Will not become a taxable issue until cashed; if never cashed, then US Treasury finds itself the holder & not our heirs. Unclaimed paper bonds are already an issue for the Treasury, so imagine how many more electronic bonds may become lost forever!

    I purchase via Treasury Direct but only because this is the only avene available!

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