I-Bonds, also called Series I Savings Bonds, offer inflation protection that makes them worth watching when prices rise. The U.S. Treasury adjusts the interest rate on these bonds every six months based on the Consumer Price Index, so your earnings keep pace with inflation.
Here's how they work. I-Bonds pay a composite rate made up of two parts: a fixed rate that never changes, plus a variable inflation rate that resets twice yearly in May and November. The current composite rate sits at 5.27 percent through April 2024, though this rate will adjust when the next inflation data arrives. You can buy I-Bonds directly from TreasuryDirect.gov in amounts ranging from $25 to $10,000 per person, per calendar year.
The appeal is straightforward for savers. When inflation accelerates, the variable portion of your I-Bond rate climbs, protecting your purchasing power. If inflation cools, your rate adjusts down but never goes below zero. You cannot lose money to deflation with these bonds.
The catch matters. I-Bonds require a one-year holding period before you can cash them out. If you withdraw before five years, you forfeit the last three months of interest as a penalty. Hold them for five years or longer, and you avoid that penalty entirely. This makes I-Bonds better suited for money you won't need in the near term.
Tax treatment differs from regular savings accounts too. I-Bond interest remains free from state and local income taxes. Federal income tax applies, but you can defer reporting it until you redeem the bonds or they mature after 30 years. This deferral feature appeals to higher-income earners in peak tax years.
For conservative savers tired of money market accounts earning sub-3 percent returns, I-Bonds present a solid alternative when inflation runs high