Is it a good idea to invest in I bonds to protect cash from inflation? (2024)

Is it a good idea to invest in I bonds to protect cash from inflation?

Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.

When you redeem, you get both the initial principal and interest. Overall, I bonds can be a safe investment option for individuals seeking to protect themselves from inflation while earning a decent return.

The cons of investing in I-bonds

There's actually a limit on how much you can invest in I-bonds per year. The annual maximum in purchases is $10,000 worth of electronic I-bonds, although in some cases, you may be able to purchase an additional $5,000 worth of paper I-bonds using your tax refund.

I bonds issued from November 2023 through April 2024 have a guaranteed 5.27% yield. There are some good reasons to buy I bonds, such as to protect your money from inflation. However, there are some drawbacks to take into consideration first, including the withdrawal restrictions.

The current inflation interest rate of 5.27% makes I Bonds attractive for savvy investors. Note that the actual rate you'll likely get will be less than that since you'll likely forfeit 3 months' worth of interest. If you want a guaranteed investment to protect your cash from inflation, you can consider I Bonds.

There is generally a $10,000 limit per year for purchasing I Bonds, but there are a few ways to get around this limit.

The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases. If you're saving for the short term, a CD offers greater flexibility than a savings bond.

More about savings bonds

The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.

What happens to I bonds when inflation goes up?

The combined rate changes every 6 months. It can go up or down. I bonds protect you from inflation because when inflation increases, the combined rate increases.

How do I cash my electronic bonds? Go to your TreasuryDirect account. Go to ManageDirect. Use the link for cashing securities.

That rate is currently set at 3.94%, annualized, for six months. It will adjust again on May 1, 2024, rolling into effect for all I Bonds, no matter when they were purchased. The current composite rate is 5.27% annualized for six months for purchases through April 2024.

Series EE savings bonds are a low-risk way to save money. They earn interest regularly for 30 years (or until you cash them if you do that before 30 years). For EE bonds you buy now, we guarantee that the bond will double in value in 20 years, even if we have to add money at 20 years to make that happen.

EE Bond and I Bond Differences

The interest rate on EE bonds is fixed for at least the first 20 years, while I bonds offer rates that are adjusted twice a year to protect from inflation. EE bonds offer a guaranteed return that doubles your investment if held for 20 years. There is no guaranteed return with I bonds.

Once a Series I bond is five years old, there is no interest penalty for redemption. Question: Can you determine what the value of a Series I bond will be in future years? inflation rate can vary. You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline.

Another advantage is that TIPS make regular, semiannual interest payments, whereas I Bond investors only receive their accrued income when they sell. That makes TIPS preferable to I Bonds for those seeking current income.

I savings bonds earn interest monthly. Interest is compounded semiannually, meaning that every 6 months we apply the bond's interest rate to a new principal value. The new principal is the sum of the prior principal and the interest earned in the previous 6 months.

Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.

As for your long-term money, you're likely better off in assets, such as stocks, that fluctuate more than cash, but that tend to deliver higher returns over time. That's because even though cash looks attractive now, it's historically done a lousy job keeping up with inflation.

Where would you keep your cash while inflation is high?

Keeping your money in savings and share certificate accounts is a wise place to start in protecting yourself from inflation.

Traditional inflation-resistant assets include real estate, commodities and consumer cyclical stocks.

You can cash in an I bond after a year, but if you withdraw sooner than five years, you'll pay a penalty of the last three months' interest. Because your rate changes every six months, it's smart to withdraw when your penalty will be based on a lower rate—and avoid cashing out when you'd be forfeiting a high rate.

You can cash in electronic bonds online with TreasuryDirect, which will send the cash from the bond to your savings or checking account within two business days.

§ 359.16 When does interest accrue on Series I savings bonds? (a) Interest, if any, accrues on the first day of each month; that is, we add the interest earned on a bond during any given month to its value at the beginning of the following month.