|Series I bonds: Your protection
Many people seeking shelter from
a decline in fixed-income investment returns run for the cover of
One bond in particular, the Series I bond, is especially
worth considering because it's the only inflation-indexed savings
bond. It has a fixed-rate of return plus an inflation premium. You
won't lose principal or the fixed interest rate.
CDs offer no inflation protection and are subject
to state and local taxes, which further erode returns.
I bonds earn interest for up to 30 years and are sold
in eight denominations: $50, $75, $100, $200, $500, $1,000, $5,000,
and $10,000. When you buy them online through TreasuryDirect, a
$25 denomination also is available.
You must hold I bonds for 12 months to get the original
investment and earnings. However, if you cash them out in less than
five years, you'll forfeit three months' interest.
The interest on I bonds is comprised of two separate
rates: a fixed rate of return and an annualized rate of inflation
as measured by the Consumer Price Index for all Urban Consumers
The fixed rate and the inflation rate are adjusted
every May and November by the Treasury Department. But the fixed
rate you buy the bond at is good for as long as you hold the bond.
Rate updates explained
Here's how it works. Suppose you buy an I bond in December. The
fixed rate that was set in November will be your permanent fixed
rate. You'll also get, for six months, whatever inflation rate was
set in November. When June rolls around your inflation premium will
be changed to whatever rate was established in May.
I bonds increase in value monthly, and interest is
compounded semiannually. The interest accrues and is paid at maturity.
You may choose to report interest each year as it
accrues or you may defer payment of the federal tax on the interest
until the bond is cashed, which gives you, the investor, control
over when to pay the tax.
Investors may purchase up to $30,000 worth of paper
I bonds per year per Social Security number. You may also purchase
up to $30,000 in electronic I bonds through Treasury Direct.
Be aware that in a co-ownership situation, either
party can cash the I bond without the knowledge or approval of the
I bonds can be used to pay
for college tuition and fees. Up to 100 percent of the interest
in I bonds is exempt from federal taxes is you meet certain eligibility
I bonds can be bought and redeemed at many financial
institutions. They may also be available through your employer's
payroll savings plan, or you can order