In a yield-starved world where savings rates at big banks are an insultingly low 0.01% and “high yield” online savings accounts are reduced to 0.5%, there is a little-known option that offers individual investors the ability to earn 1.68% risk free. It is the government’s Series I Savings Bonds. The I stands for inflation protection.
These bonds have a floating interest rate that adjusts every six months based on the observed inflation rate over the prior six months. It is currently set at 1.68% for the next six months. Should inflation increase in the future (certainly possible given record government debt as a percentage of GDP), the interest on these bonds will rise in lockstep with inflation. There is no risk as the bonds are guaranteed by the US government and the rate can never drop below zero (even if we actually experience deflation). Further, the interest on the bonds are tax-deferred until you cash them in. If the proceeds are used to fund higher education, the interest can be tax-free if you meet certain income thresholds. This is an absolute bargain in the current zero-interest rate environment.
By now you may be wondering what’s the catch? If you are not, you should be. A healthy dose of skepticism is important when things seem too good to be true. Always ask why. There are a number of limitations, which I lay out below.
Purchase Limitations
The most important limitation is that each individual can only buy $10,000 worth of Series I Savings Bonds per calendar year. A couple would be able to buy $20,000 total each year. The reason these bonds are such a good deal is because the government is trying to encourage the small investors to save more. (This is one of the rare situations where the small investor has an advantage over the large institutional investor). Because we are now in November, you could buy $10,000 per person now and then turn around and buy another $10,000 per person in January. Parents who wish to set up custodial accounts for their children can also contribute $10,000 per child.
Redemption Limitations
Series I Savings Bonds are technically thirty-year bonds which means they mature in thirty years. You are prevented from redeeming in the first year. Between one and five years, you can redeem the bonds by paying a penalty of three months’ worth of interest. After five years, you can redeem the bonds penalty free.
How to Use the Series I Savings Bonds
The Series I Savings Bond should be the preferred account to house your rainy-day fund. Ideally, you would buy $10,000 of these bonds each and every year. Even if you end up paying the early-withdrawal penalty of three months interest, the interest rate on these bonds are so much higher than the alternatives right now that it is clearly the superior choice.
Where to Buy
You can buy Series I Savings Bonds online directly from the US Treasury via Treasury Direct. Visit the link to buy the bonds or learn more about them. (Note there are other types of notes and bonds available for purchase via Treasury Direct, but only the Series I is a true bargain).
Disclosure:
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
The information in the article is provided for informational purposes only. It should not be construed as investment advice or advice on buying, selling, or other types of transactions relating to an investment in products or services, much less an invitation, an offer or a solicitation to invest.
The information in the article is provided solely by virtue of the fact that everyone will independently make their own investment decisions: the report does not take into account investment objectives, nor specific needs or financial situation. In addition, nothing in the article represents or is intended to express financial, legal, accounting or tax advice. You should consult your own investment or financial advisor before taking any actions.
