Why I Bonds Are the Safest Investment You Can Make

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Series I savings bonds, or "I bonds" for short, come with guarantees, tax-deferred inflation-adjusted interest, and, after one year, liquidity. They could be one of the best cash investments you ever make.

Key Takeaways

  • I bonds are a good cash investment, because they are guaranteed and have tax-deferred inflation-adjusted interest, and they are liquid after one year.
  • The most you can buy is $10,000 a year per person, but you can buy an additional $5,000 in paper bonds with your tax return.
  • I bonds accumulate interest, and you can cash them in during retirement to make sure you have safe, guaranteed investments available.

I Bonds as a Safe Investment for Your Emergency Fund

I bonds make a great second-tier emergency fund. They're second-tier, because you can't sell them within the first 12 months of purchase, so you need other liquid funds to rely on while you build up a stash of I bonds.

The most you can buy is $10,000 a year per person. You can open an account directly with the Treasury Department through TreasuryDirect. Interest is tax-deferred.

Consider building up a significant holding of I bonds and buying the maximum amount of I bonds each and every year.

You can buy an additional $5,000 in paper bonds if you direct your tax refund toward the purchase. There's a $25 minimum for each bond purchased, and you can even specify the bond to the penny, such as $25.99. 

If you look online at I bond rates, the composite rate for I bonds issued from May 2021 through October 2021 was 3.54%. This was composed of a fixed rate of 0.00% and a semiannual inflation rate of 1.77% (which makes an annualized rate of 3.54%). Where else can you get 1.68% guaranteed tax-deferred interest on a safe and liquid investment right now while knowing that if interest rates go up, yours will also likely go up? That is what makes I bonds an excellent, safe cash investment.

Use I Bonds to Fund Future Healthcare Premiums

Healthcare premiums and out-of-pocket costs in retirement will run about $4,300 per year per person. If you start buying $4,300 per year of I bonds now, as the interest they accrue is tied to inflation, you can begin cashing them in later in retirement to make sure you have safe, guaranteed, inflation-adjusted investments available to cover medical costs in retirement.

How to Buy I Bonds

You can open an account line with TreasuryDirect, link it to your bank account, and transfer money over to buy the maximum amount of I bonds each year. You can purchase paper I bonds directly with your tax refund each year.

TIPS Bonds

TIPS bonds (treasury inflation-protected securities) are different from I bonds. Unlike I bonds, the interest on TIPS is not tax-deferred, so this vehicle is best owned inside tax-deferred accounts like an IRA or Roth IRA. Unfortunately, you can't open an IRA account directly at TreasuryDirect, so TIPS in your IRA must be purchased through a brokerage account.

Tax Treatment of Bonds

The taxable income on Series I bonds can be deferred until the time of redemption. With bonds that have been held for decades, it can add up. If the proceeds are used for higher education expenses, the bond can be excluded from taxable income.

When Does an I Bond Change Rates?
Issue Month New Rates Take Effect
January January 1 and July 1
February February 1 and August 1
March March 1 and September 1
April April 1 and October 1
May May 1 and November 1
June June 1 and December 1
July July 1 and January 1
August August 1 and February 1
September September 1 and March 1
October October 1 and April 1
November November 1 and May 1
December December 1 and June 1

How Do I Find Out How Much My I Bond Is Worth?

You can use the TreasuryDirect website to calculate the value of your I bonds. If you have electronic bonds, simply log into your account and look up any current bonds you own. For paper bonds, you can use the online calculator to enter your bond information and find out what it's currently worth.

How Long Does It Take for a Series I Bond to Mature?

An I bond matures for 30 years or until you redeem it, whichever comes first. It will accrue interest as long as it is maturing. You can redeem the bond after it's one year old. However, if you redeem it before it's five years old, you will pay a penalty worth the last three months of interest.

When Is I Bond Interest Paid?

Interest in I bonds is compounded every six months, so after each six-month period, any interest earned during that time will be added to the bond's principal value.