Why I Bonds Are the Safest Investment You Can Make

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I Bonds come with guarantees, tax-deferred inflation-adjusted interest, and after one year, liquidity. This 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 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 fixed rate as of Nov. 1, 2020, is 0.00%. A semiannual inflation rate is also applied, and from Nov. 1, 2020 to April 30, 2021, it is 0.84%, which means an annual rate of 1.68%. Where else can you get 1.68% guaranteed tax-deferred interest on a safe and liquid investment right now while knowing that if rates go up, your rate will also likely go up? This 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 a year per person. If you start buying $4,300 a 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.

TIPS Bonds

TIPS Bonds (referred to as treasury inflation protected securities) are different than 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. For bonds that have been held decades, this can add up. If the proceeds are used for higher education expenses, the bond can be excluded from 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