In response to last week’s article on interest rates, one reader wrote in to ask about savers using Treasury Inflation-Protected Securities (TIPS) to save and keep pace with inflation.
The short answer is that, yes, they can use those investments for that purpose. But if you’re looking for decent inflation protection through government bonds — I think I-Bonds make more sense than TIPS right now.
And the timing couldn’t be better for a discussion of this type of investment since the latest interest rate for I-Bonds was just announced last week.
Let’s Start With a Quick Summary of What I-Bonds Are …
I-Bonds are officially known as Series I Savings Bonds, and like their better-known counterparts — Series EE Savings Bonds — these bonds are NOT marketable securities. That means you can’t sell them on the open market, and as a result, their value doesn’t fluctuate.
In other words, unless the U.S. government defaults, you cannot lose any of your principal by owning I- Bonds. But by holding these bonds you will earn interest — which is comprised of two components: A baseline interest rate and an inflation adjustment.
As you might guess, that baseline rate — which sticks with the bond for its entire 30-year lifespan — has been stuck at zero for some time right now.
However, the inflation adjustment is determined twice a year in May and November … and is based on changes in the Consumer Price Index (CPI) for the prior six months.
The new six-month rate — which was just announced on November 1 — is 0.88 percent, or 1.76 percent on an annual basis.
Is that a great rate? Maybe not compared to some of the dividend stocks I recommend in Income Superstars.
But it’s far better than what you’d find from a one-year CD right now!
Better yet, you get the same basic government-backing that CDs come with. In fact, the backstop on I-Bonds is even MORE direct because it comes straight from Uncle Sam rather than the FDIC or NCUA.
Plus, in the case of I-Bonds, your interest is exempt from state and local taxation! You can also get the income exempted from federal taxes when the proceeds are used for qualified education expenses.
There Are Just a Couple More Things You Need to Know …
For starters, you must hold I-Bonds for at least 12 months, and if you sell before you’ve held them for five years, you’ll forfeit the most recent three months of interest. I don’t consider this penalty to be a big deal, especially since other investments like CDs come with similar early-redemption charges.
In addition you are limited to buying $5,000 of electronic I-Bonds a year per social security number. However, if you have a couple family members, you can load each one up with some.
So if you’re interested in looking for a relatively safe investment with an inflation kicker, I think I-Bonds can fit the bill. For more information or to purchase these investments, just visit the Treasury’s official online platform, www.treasurydirect.gov.