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-- Posted: Sept. 5, 2000

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

Do Series-I savings bonds belong in my portfolio?

Dear Dollar Diva,
My husband and I both contribute 15% to our employer sponsored 401(k)plans. We are both in our early 40s, no kids, and have a manageable mortgage payment. We have about $50,000 in various non-IRA investments. Are the Series-I bonds a good investment vehicle for some of our savings?

-- Beth


The Diva likes Series-I savings bonds, and it looks like they might fit into your savings plan. The first thing you need to look at is your asset allocation. Where do you want your savings to go?

Let's assume you've decided on the following asset allocation:

Category

Percentage

Bonds

20%

Large-cap stock funds

45%

Mid and small-cap stock funds

25%

International stock funds

10%

If you're on target with your stock fund investing, then it's time to put your extra money in bonds.

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Why I-bonds?
Bonds are less risky than stocks, but there is some volatility. Most of them react to changes in interest rates; when interest rates go up, bond values go down, and vice versa. Not so with I-bonds; if the face value of your bond is $1,000, you will never receive less than $1,000 when you redeem it. Here are some other good reasons to invest in I-bonds:

  • Zero risk. I-bonds are savings bonds backed by the U.S. Government.
  • Indexed for inflation. Interest is a combination of a fixed rate (never changes) and an inflation rate (goes up or down semiannually, depending upon the Consumer Price Index). The current combined rate is 4.66 percent, of which 1.10 percent is fixed.
  • No transaction fees. Buy them directly from the U.S. Treasury online, or from your local bank or credit union.
  • Eight denominations: $50, $75, $100, $200, $500, $1,000, $5,000, $10,000.
  • Tax-deferred up to 30 years. No federal income tax is paid until the bond is redeemed.
  • Tax-exempt from state and local taxes.
  • Education Savings Bond Program. Use the proceeds for college tuition for yourself, your spouse or dependent, and the interest may be tax free. See IRS Publication 550, Investment income and expenses for details.

Series I bonds and EE bonds purchased as of February 1, 2003 must be held for one year, as opposed to six months, before cashing out.

For a comparison of I-bonds and EE bonds see the U.S. Treasury's Web page "What's the difference between I bonds and EE bonds?"

-- Updated: May 1, 2003

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