Series I bonds: Your
protection against inflation
Many people seeking
shelter from the decline in fixed-income investment returns are running for the
cover of savings bonds.
One bond in
particular -- the Series I bond -- is garnering a lot of attention. The government
began issuing I bonds in September 1998. It's an inflation-indexed, shining light
in this long, dark economic tailspin.
are at their lowest interest rates in almost 20 years. They offer no inflation
protection and are subject to state and local taxes. That makes I bonds look pretty
an I bond?
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.
Originally you had to hold I
bonds for six months before you were allowed to cash out. The government extended
the minimum holding period to one year effective with bonds issued as of Feb.1,
2003. However, if you cash them out in less than five years, you'll forfeit three
What makes the I bond so popular is it's
the only inflation-indexed savings bond. You won't lose principal or the fixed
The current interest on I bonds is 4.8 percent. That's
comprised of two separate rates: a 1.20 percent fixed-rate of return
and 3.58 percent variable semiannual inflation rate.
rate is just that, fixed for the life of your bond. The Treasury Department adjusts
the inflation rate every six months -- in May and November.
However, both the fixed and inflation rate can be changed
with each new issue of bonds every six months.
bonds have been selling quite well and become more popular as people learn about
them," says Christina Graff of the Treasury Department's Philadelphia Savings
Bonds marketing office.
"A lot of people tell us they're
happy with the inflation protection, and it's a little simpler to understand than
the EE savings bond in terms of what you're holding. I bonds are purchased at
face value vs. EEs, which are bought for half the face value and eventually mature
to full value."
Daniel Pederson, author of "Savings
Bonds: When to Hold, When to Fold and Everything In-Between," says he
expects I bonds to continue outselling EE bonds, the Treasury's other savings
bond, for at least the short term.
Pederson considers the I bond one of the better alternatives to
low-rate CDs. At this writing, the average yield on a 5-year CD
according to Bankrate's
CD rates is 4.42 percent. Another benefit is I bonds are exempt
from state and local taxes, where the CD or money market is subject
to state and local taxes.
financial planner Barry Vosler of DeWitt, Iowa, says as long as inflation doesn't
drop too drastically, I bonds are a good bet.
snapshot of what else is available in the market. It has a higher interest rate
than Treasury obligations and most CDs. It's very competitive right now."
bonds weren't the darling of the conservative investment world when they were
first issued, according to Pederson.
"Inflation was abnormally
low -- it was at something like 1.2 percent. It was like selling hot chocolate
in the summer, but it quickly turned to winter when inflation returned to normal
levels of about 2.5 to 3 percent. It's become a very attractive product."
I bonds increase in value monthly, and interest is
compounded semiannually. The interest accrues and is paid at maturity. Federal
tax on the interest is deferred 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 I bonds per year per Social Security number. In a family
that wishes to have significant resources in conservative investments, the husband
and wife could each buy $30,000 worth of I bonds. They could then purchase an
additional $30,000 for each of their children simply by putting the child's name
first on the bond and listing the husband or wife as co-owner.
aware that in a co-ownership situation, either party can cash the I bond without
the knowledge or approval of the other. So, if your intention is to hold the bond
as an investment but little Susie thinks it should pay for her first car, you
may want to have a talk.
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 if you meet certain eligibility
I bonds can be bought and redeemed
at just about any financial institution. They may also be available through your
employer's payroll savings plan, or you can download order
forms and mail them in.