Why I-Bonds May Be the Right Place for Your Money Now

With high inflation, many people have been talking about Series I savings bonds to beat rising prices. To help you decide if I-bonds are the right place for your money, we talked to Andrew Lokenauth, financial executive and founder of Fluent in Finance, a community focused on financial planning and wealth building. Lokenauth has a bachelor's degree in finance and accounting from Pace University and over 15 years of experience working on Wall Street, in technology, and with startups. Here’s what he has to say about what I-bonds are as well as the benefits and drawbacks of this type of investment.

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I-bonds are a type of bond that helps protect your purchasing power from inflation. The bond's interest rate is based on a combination of a fixed rate set when the bond is purchased, and an inflation rate that changes every six months. The interest rate is adjusted every six months to keep up with inflation. 

Related: How to Outsmart Inflation

The average annual inflation rate for 2022 was 8%. While December figure dropped to 6.5%, that is still much higher than what most Americans have come to expect. To give you an idea of how I-bonds compare, the current I-bonds interest rate for the six-month period from November 2022 to April 2023 is 6.89% meaning if inflation stays as is or trends downward, you’ll actually have the potential to beat inflation. By comparison, the average interest rate in a savings account at the bank is a mere 0.33% according to the FDIC. 

Related: How to Jump-Start Your Retirement Planning in 2023

To purchase an I-bond, Lokenauth says you can do it online at the Treasury Direct website. To make an online purchase, you'll need to set up an account and complete a one-time registration process. After that, you select how much you want to purchase. You can also purchase paper I-bonds using your tax refund. 

Related: Ways to Jump-Start Your Retirement Savings

The minimum purchase amount for electronic I-bonds is $25, and the maximum purchase amount is $10,000 per person per calendar year. That means if you have a spouse, you could both purchase $10,000 each year. Every individual can also purchase up to $5,000 in paper I-bonds using their tax refund so plan ahead to tax season if you want to do this. Paper I-bonds come in $50, $100, $200, $500, or $1,000 increments. 

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Once you have I-bonds, Lokenauth says you should consider holding them to maturity. That’s because the Treasury guarantees the bond will be worth at least its original value. Also, because the interest rate is based on inflation, holding them to maturity may result in a higher return.

It is important to know before putting your money into I-bonds that you can’t access the money for one year. That means it isn’t a good place for your emergency fund, which needs to be liquid. I-bonds reach maturity five years from purchase. If you have to withdraw them before that date, there is a penalty in the form of the prior three months’ interest. If the interest rate goes up significantly, you’ll have to decide if cashing out early is worth the penalty.

Lokenauth says there are a lot of benefits to I-bonds that make them a worthwhile consideration for investors. First, the U.S. government issues them, so they're considered very safe as there is minimal risk of losing your principal.

Another benefit to I-bonds is that "they are tax-advantaged, meaning you don't have to pay taxes on the interest earned until you redeem the bond," says Lokenauth. They provide a guaranteed rate of return, which is adjusted for inflation, making them a good option to preserve purchasing power. Very few investments offer a guaranteed rate of return that can keep up with inflation.

Although a guaranteed rate of return sounds good, that guarantee is only to keep up with but not beat inflation. I-bonds have a low rate of return compared to other investments, which may make them less attractive to investors looking for high returns. They are also not a good choice for people who may need to access their money quickly since they are not redeemable for one year.