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One of the safest investments to protect your money from inflation is about to get even more appealing.
The annualized rate for Series I Savings Bonds, aka I bonds, will jump to at least 9.62% in May — an all-time high, making the government bond an even more attractive way for everyday Americans to protect their savings from record-setting inflation.
Since November, the interest rate for I bonds has been a notable 7.12%. Every six months, in November and May, the U.S. Treasury sets a new “variable” interest rate based on the previous six months of inflation.
By design, experts say I bonds are one of the safest ways to hedge against inflation.
David Enna, founder of the financial website TIPS Watch (short for Treasury Inflation Protected Securities), has a track record of accurately forecasting I bond rates, including the current 7.12% rate. As Enna explains, it’s not about using a crystal ball. Rather, it's a matter of simple math — and knowing where to look.
While the Treasury won’t officially announce the new variable rate until May 2, the Labor Department has already publicly released all the inflation data that the Treasury uses to calculate it.
“When the inflation report for the last month — either in April or October — comes out,” Enna says, “you can tell what the rate is gonna be weeks before they announce it.”
On Tuesday, the Labor Department released its latest inflation report, stating that the inflation rate rose to 8.5% in March, the final piece of the puzzle.
With that, we now know the rate of inflation between September 2021 and March 2022 was 4.81%. Thus, the six-month variable rate for I bonds will be 4.81%. (Multiply that by 2 to get to the annualized rate of 9.62%.)
“The 7.12% variable rate was already a record high for the I Bond, which was first issued in September 1998,” Enna wrote in a TIPS Watch report Tuesday. “So the new rate of 9.62% will crash through that record high.”
Compare that to the average yield for a savings account right now: 0.06%, according to the FDIC. The best savings accounts and certificates of deposit (CDs) from commercial banks offer annual yields 10 to 12 times higher than that (0.5% to 0.75%), but those rates are still a far cry from 9.62%.
“To add insult to injury, the little bit of interest [from savings accounts] is subject to income tax,” Zvi Bodie, economist and professor emeritus at Boston University, previously told Money. Interest earned from I bonds, on the other hand, is tax deferred until they’re cashed out.
Investing in I bonds: pros and cons
In times of high inflation, I bonds sound like a no-brainer. That is exactly what they’re designed to protect against, after all.
In addition to being a safe hedge against inflation, they offer tax perks. Interest earned from I bonds is exempt from state and local taxes, and you will only pay federal taxes on the interest when you cash them out. Another tax benefit? You can avoid paying even federal income taxes on I bonds if you are using them for qualified higher-education expenses, such as tuition and fees for most colleges, universities or vocational schools.
Another unique feature of I bonds is how the interest accrues. The Treasury Department says that you will still get a full month’s worth of interest no matter if you purchase your I bond on the first or last business day of the month.
Similarly, you can buy an I bond on the last business day of April and still lock in six full months of the annualized 7.12% rate before it changes in May. (Keep in mind, because it’s only for six months, the rate is effectively 3.56%.) After six months are up, the interest is compounded, added to your bonds’ principal value, and then the new rate will automatically tick up to 9.62% (or a six-month rate of 4.81%).
Hypothetically, if you were to purchase I bonds today, you can confidently predict your return for the next year by combining those two six-month rates for a guaranteed 12-month rate of 8.37%.
However, there are a few big caveats. For one thing, I bonds can’t be cashed out within the first year. (There is an exception for emergency situations.) Similarly, if I bonds are cashed out within five years of purchase, you will miss out on the final three months worth of interest.
You are also limited in how much you can invest annually — $10,000 per person for electronic I bonds; and $5,000 worth of paper I bonds only purchasable when you file your federal taxes. (Update April 15: To purchase paper versions of I bonds, you must elect to use your tax refund at the time of filing with IRS Form 8888. The average refund is about $3,200 this year, so it is not likely most people will be able to purchase the maximum amount.)
Given that, financial experts say I bonds can be viewed as an inflation-protected savings account more so than a major long-term moneymaking investment.
- 6.89% annualized interest rate
- Designed to protect savings from inflation
- Tax deferred interest
- Interest exempt from state and local taxes
- Exempt from federal taxes if used toward higher education expenses
- Fairly liquid investment
- 30-year maturity
- Backed by full faith of U.S. government
- Limited potential for real earnings
- Annual purchase limit of $15,000 per individual, $5,000 of which is only purchasable with your tax refund
- Can not be cashed out within one year (emergency notwithstanding)
- Three month interest penalty for cashing out within five years
- Not as liquid as a regular savings account
- Must open account with clunky TreasuryDirect.gov
How I bonds' interest rates work
In addition to the variable rate mentioned above, I bonds have a separate “fixed” rate. This second rate will stay the same over the lifetime of the bond and will determine the I bonds’ overall yield, sometimes called the “composite rate.”
The fixed rate is announced on the same schedule: the first business day of November and May. Since 2020, the fixed rate has been 0%, and it has not exceeded 1% since before the Great Recession.
The Treasury Department confirmed to Money that the fixed rate can never drop below zero — and neither can the combined rate, for that matter. What this means is that the money you put in to I bonds won't lose value no matter how bad inflation gets. (No stock can promise that, and if the interest in your savings account is lower than inflation as usual, then the money sitting there is effectively losing value year after year.)
Come May, the composite interest rate for I bonds will be at least 9.62%. Though unlikely, it could possibly be higher if the Treasury also announces a fixed rate above 0%, which would drive the composite rate above 9.62%.
Here’s a closer look at the fixed rate:
- The fixed rate, as its name suggests, is locked in for the entire lifespan of the I bond — 30 years or the date you sell it, whichever is sooner.
- The fixed rate is determined at the date of purchase. If you purchase an I bond with a 0% fixed rate, it will never change. (But the variable rate can and will change, depending on inflation.)
- Historically, the fixed rate has ranged from 0% to 3.6%. It’s been stuck at 0% since 2020.
Together, these two rates preserve your savings' purchasing power and, in some cases, increase it.
For example, folks who purchased I bonds way back between May and October of 2000 locked in a fixed rate of 3.6% — the highest it has ever been — until 2030.
When the variable rate changes next month, these investors will benefit from a combination of those two historically high rates. While their fixed rate stays put at 3.6%, their variable rate will tick up to an annualized 9.62%.
The combined rate? A whopping 13.39%.
Clarification: This article was updated on April 15, to clarify that the paper versions of I bonds can only be purchased with your tax refund.