Earn 7% risk-free with your savings with government bonds I.


    Forget about high-yield savings accounts and CDs. If you are looking for a near-risk-free way to make your money grow, Uncle Sam has an attractive offer.

    The US government announced a new interest rate of 7.12% on Series I savings bonds from November 2021 to April 2022 – the second-highest interest rate ever on these investments.

    This is big news because Series I bonds – also known as Inflation Bonds or I-Bonds – have a much higher return than other conservative investments like high yield savings accounts and certificates of deposit (CDs).

    In connection with this, the best annual interest rate for a one-year CD is currently around 0.65% to 0.75%, while the best five-year CDs only pay around 1.2% per year.

    At 7.12%, these bonds offer an interest rate that is around 12 times higher than what you would currently make with the best savings accounts.

    In fact, 7.12% is closer to the historical annual average of the stock market – typically 10% – than current CD prices.

    And since I-Bonds are backed by the full trust and credit of the US government, your risk of losing money is virtually zero. (Historically, the U.S. government has never defaulted on bonds.)

    But before you rush to buy I-Bonds, there are a few things you need to know.

    What are I-bonds and how do they work?

    I-bonds are designed to protect your dollar’s purchasing power from inflation.

    I bond rates actually combine two different numbers:

    • A fixed rate of return that stays the same throughout the life of the bond. (It is currently 0%.)
    • A semi-annual (twice a year) rate of inflation that fluctuates due to changes in the consumer price index.

    Rising inflation triggered the new, higher I-bond rate. Annual inflation rose 4.4% in September – the fastest pace in over 30 years, according to a report by the US Department of Commerce.

    In fact, inflation has soared this year that the government nearly doubled the floating rate on I-bonds (it was set at 3.34% just six months ago).

    While new buyers enjoy 7.12% of these bonds for the time being, this rate can change after six months. It rises or falls depending on national inflation.

    Check out this US Treasury Department chart to see how I-bond rates have changed over time.

    On May 1, 2022, the Ministry of Finance will calculate a new inflation rate. If inflation continues to heat up, you could get more interest on your bonds. When it cools down, your variable rate goes down.

    You won’t lose money if the interest rate goes down – you just won’t make that much. (For example, the inflation rate of I-bonds was only 0.24% in May 2015.)

    However, new buyers of I-bonds will miss out on the fixed rate that buyers have enjoyed over the years.

    That’s because the current fixed rate on I-bonds is absolutely nothing.

    Right: The fixed interest rate has flattened out at 0% since May 2020.

    Since this half of the loan rate is locked in, your 0% fixed rate won’t increase over time. Instead, all of the money you make on an I-bond purchased today is made from the semi-annual inflation-based rate.

    Interesting facts about I-bonds

    I-bonds may be almost risk-free, but they still come with rules and restrictions.

    First, these are 30-year bonds. Your cash is not locked for the entire 30 years, but you will not have access to your funds for at least 12 months. The government will not allow you to pay off an I-bond earlier.

    You can redeem it after a year, but you will lose three months in interest if you pay off less than five years after the purchase.

    I Bond Fast Facts

    • I bonds are sold at face value (no fees, sales tax, etc.)
    • You earn monthly interest that is compounded twice a year.
    • The bond matures after 30 years (no interest).
    • You have to wait at least a year to redeem I-bonds.
    • You lose three months in interest payments when you redeem a bond that you have owned for less than five years.
    • The minimum investment is $ 25.
    • The maximum investment in digital I-bonds is $ 10,000 per year.
    • The value of your I-bond will never drop below the value you paid for it.
    • It is exempt from state and local taxes.

    You can purchase up to $ 10,000 per person per year in digital I-bonds.

    Pro tip

    You can also buy up to $ 5,000 in Paper I bonds per year. The only way to get paper bonds is with your federal refund at tax time.

    I-bonds are tax exempt at the local and state levels.

    You can either pay federal tax on the bond each year or defer tax on the interest until the bond is repaid.

    You may be able to forego federal tax payments altogether by using the bonds for college expenses. Your Adjusted Gross Income must be less than $ 83,200 in 2021 for a single applicant to qualify for this education tax break, or $ 124,800 for couples.

    How to Buy I-Bonds

    The fastest and easiest way to buy I-Bonds is through the TreasuryDirect website. It’s a free and secure platform where you can view all of your account information, including pending transactions.

    You can also give away I-bonds.

    Another option is to purchase I-bonds at tax time with your refund.

    You can tell your tax advisor that you want to buy savings bonds with part or all of the refund. If you are using control software, the computer will guide you through the process.

    This allows you to buy I-bonds in increments of $ 50. You don’t have to invest all of your refund in bonds – you can only use part of it for a specific purpose.

    For your information, you cannot resell I-bonds and must cash them out directly with the US government. In addition, only US citizens, residents and employees can purchase these bonds.

    Pro tip

    The Treasury Department also offers a wage savings option that allows you to purchase electronic savings bonds that will be deducted from your paycheck.

    Who are bonds for?

    There are several ways that investors can benefit from buying I-bonds at the current interest rate of 7.12%.

    Scenarios in which buying I-bonds makes sense

    • You are a conservative investor worried about inflation and stock market volatility.
    • You want to diversify your equity-heavy portfolio with a safe investment.
    • You are nearing retirement and you are shifting your portfolio towards bonds.
    • You want to save money on a child’s future study costs.
    • You’re saving up for a big purchase that’s at least a year away and you want to earn a little interest on your money in the meantime.

    Since I-bonds cannot be redeemed for a year, it is important that you have enough cash in your emergency fund to cover immediate expenses.

    I bonds don’t make you rich. But for Americans who work day-to-day, these investments offer a safe way to grow their money and hedge against inflation.

    Rachel Christian is a Certified Personal Finance Instructor and Senior Writer for The Penny Hoarder.


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