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If you’re looking for ways to combat soaring prices, I bonds, an inflation-protected and nearly risk-free asset, may now be even more attractive.
I bonds pay an annual rate of 9.62% until October 2022, the highest yield since their introduction in 1998, the US Treasury Department announced on Monday.
The rise is based on March consumer price index data, with annual inflation up 8.5%, the US Department of Labor reported.
“This is a big milestone for I bonds,” said Ken Tumin, founder and editor of DepositAccounts.com, which tracks these assets closely.
I bonds, guaranteed by the US government, do not lose value and earn monthly interest based on two parts, a fixed rate and a floating rate, changing every six months.
While the variable rate is 9.62% until October 2022, the fixed rate remains at 0%, according to the Treasury.
The fixed rate stays the same for the 30-year life of the bond, meaning someone who bought I bonds with a higher fixed rate can beat inflation for at least six months, a Tumin explained.
Although the fixed rate has been 0% since May 2020, it peaked at 3.6% for six months starting in May 2000. You can view the history of both rates here.
How to buy bonds I
There are only two ways to purchase these assets: online through TreasuryDirect, limited to $10,000 per calendar year for individuals, or by using your federal tax refund to purchase an additional $5,000 in paper I bonds. There are redemption details for each here.
You can also purchase more I Bonds through corporations, trusts, or estates. For example, a married couple with separate businesses can purchase $10,000 each per business, plus $10,000 each as individuals, for a total of $40,000.
Disadvantages of Bonds I
One of the drawbacks of I bonds is that you can’t redeem them for at least a year, said certified financial planner George Gagliardi, founder of Coromandel Wealth Management in Lexington, Massachusetts. And if you cash them in within five years, you’ll lose the previous three months of interest.
“I think it’s decent, but like everything else, nothing is free,” he said.
Another possible downside is lower future returns. The variable portion of I bond rates may adjust downward every six months, and you may prefer higher-paying assets elsewhere, Gagliardi said. But there’s only a one-year commitment with a three-month interest penalty if you decide to cash out early.
Still, I bonds may be worth considering for assets beyond your emergency fund, said Christopher Flis, CFP and founder of Resilient Asset Management in Memphis, Tennessee.
“I think the I deposit is a wonderful place for people to put the money they don’t need right now,” he said, as an alternative to a one-year certificate of deposit. .
As of May 2, the average yield on savings accounts is below 1% and most one-year CDs are below 1.5%, according to DepositAccounts.
“But I-bonds are no substitute for long-term funds,” Flis added.