In recent weeks fears of renewed inflation have upset the markets. If inflation has you worried, you should take a look at Series I U.S. savings bonds (I-bonds). They're not the right investment for everyone, but they might have a place in your portfolio.
I-bonds are a safe investment - like other U.S. savings bonds they're backed by the U.S. government. But they have one unique feature. Their interest rate is adjusted every six months based on changes in the consumer price index.
So if inflation increases, the rate you earn on your bonds will follow. You don't have to worry about being locked in to a below-market interest rate. This feature, combined with other advantages of U.S. bonds, makes them an attractive investment for some situations.
Here's a recap of their basic features:
Maturity. I-bonds earn interest for 30 years, but you can redeem them after 12 months. You'll forfeit one quarter's interest if you cash them in within 5 years.
Interest. Interest accrues monthly and is compounded semiannually. The interest rate has two components: a fixed rate over the life of the bond, and a variable rate that changes every six months, linked to inflation. Interest is paid when you redeem the bond.
Taxes. I-bonds are exempt from state and local income taxes. You can defer paying federal income tax on the interest until you redeem the bond, or you can choose to pay tax annually as the interest accrues. This alternative may be preferable if you register the bond in a child's name.
Other tax breaks. If you use the proceeds from an I-bond to pay for qualified education expenses, the interest may be free of income tax.
Purchase. You can buy paper I-bonds through a financial institution, or electronic bonds on the Internet. The annual limit is $30,000 of each type. Denominations start at $25.
Whether you're buying I-bonds for yourself or for a child's education, check with our office first. How you register the bond and how you pay taxes on the interest can affect the tax advantages you'll receive.
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