When Savings Bonds Make Sense

As you survey safe options to eke out interest on your savings, one that may catch your eye is the Series I savings bond. I bonds are issued by the U.S. Treasury Department (buy them at treasurydirect.gov) and backed by the full faith and credit of the government. Such a low-risk investment has appeal for savers, “particularly when there’s so much turmoil and uncertainty in the economy,” says Greg McBride, chief financial analyst for Bankrate.com. But I bonds are likely suitable for only a portion of your savings.

An inflation hedge. An I bond’s interest rate has two parts. Each year at the beginning of May and November, the Treasury announces the fixed rate that will apply to bonds issued during the following six months. The fixed rate is 0% for bonds issued between May 1 and October 31 this year (that rate remains the same for the life of the bond). The inflation rate, however, resets every six months and is based on changes in the consumer price index. The fixed and inflation rates are combined to form a composite yield, which is 1.06% for bonds being issued now.

Where I bonds fit. The top-yielding online savings accounts offer better rates than new I bonds. And if you’re looking for a place to put your emergency fund, a savings account is the better choice because you can access the money quickly; you can’t redeem an I bond for the first 12 months. By holding an I bond to its maturity of 30 years, you’ll get maximum interest from it. But if you cash it out before five years have passed, you lose three months of interest.

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I bonds may be worthwhile for a portion of your long-term savings. Historically, “the average composite rate has generally been higher than the average rate for online savings accounts,” says Ken Tumin of DepositAccounts.com. Plus, an I bond’s interest is exempt from state and local income tax, and you can defer federal income tax until you redeem the bond or it reaches maturity.