Get a Government-Backed 9.62% with This Investment

With the stock market tumbling, investors are on the hunt for safer investments that pay attractive returns. The fact that you can earn 9.62% from a U.S. Savings Bond is getting a lot of buzz.

Today, let’s review the features, pros, and cons of investing in these Series I Savings Bonds.

The U.S. government sells two types of saving bonds. We may remember the Series EE Bonds from our youth when we received them as gifts. EE Bonds pay a fixed rate, currently set at 0.10%.

Series I Bonds pay a fixed rate plus the inflation rate. The fixed-rate sits at 0.0%; however, the inflation rate portion is currently set at 9.62%.

Series I Bond rates are set twice a year on May 1 and November 1. The rate you initially earn will be in effect for the six-month window when you purchase your I Bonds. To lock in the current 9.62% rate, you must buy I Bonds no later than October 28.

Series I Bonds compound semi-annually. This means if you buy an I Bond now, it will earn 9.62% for six months, and then the rate will reset to the rate in effect on the semi-annual anniversary date. Simply put, the Series I Savings Bond rate resets every six months.

Here are the features of Series I Savings:

• You can buy up to $10,000 of electronic I Bonds per year per person. You buy bonds through the Treasury Direct website.
• You can buy electronic bonds for any amount of $25.00 or greater.
• You can invest up to $5,000 of your federal tax return into paper I Bonds.
• Paper bonds come in denominations of $50, $100, $200, $500, and $1,000.
• I Bonds earn interest for up to 30 years.
• You can redeem a bond after one year, but if you redeem during the first five years, you will be charged a three-month interest penalty.
• I Bond interest is exempt from state income tax.
• For federal income taxes, you can declare the interest each year and pay taxes or let the interest grow tax-deferred until you redeem the bonds.

Overall, in this era of high inflation, Series I Bonds are a pretty good place to sock away some money.

But, there are some potential pitfalls to consider:

• The $10,000 annual investment cap limits how much money you can put into I Bonds. You can’t sock away your entire nest egg and earn a government guaranteed 9.62%.
• Interest compounds to the value of the bond. You cannot elect to have the interest paid out. Your earnings will be tied up until you redeem the bonds.
• The semi-annual rate reset means you may earn a much lower interest rate in the future. The next reset on November 1 should be very attractive, but the rate could be much lower a few years later.

If you can live with the restrictions, Series I Savings Bonds offer an attractive, U.S. government-guaranteed return with the current 9.62% yield (if purchased before October 28), and can provide some stability to your investment portfolio. You can buy savings bonds through an account on the TreasuryDirect.gov website.

— Tim Plaehn

Source: Investors Alley