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If you are looking for ways to combat high prices, I-bonds, an inflation-protected and almost risk-free asset, can now be even more appealing.
I-bonds pay an annual interest rate of 9.62% until October 2022, the highest return since they were introduced in 1[ads1]998, the US Treasury Department announced on Monday.
The increase is based on consumer price index data from March, with annual inflation growing by 8.5%, the US Department of Labor reported.
“It’s a milestone for I-bonds,” said Ken Tumin, founder and editor of DepositAccounts.com, which monitors these assets closely.
I-bonds, backed by the US government, do not lose value and earn monthly interest rates based on two parts, a fixed interest rate and a variable interest rate, which changes every six months.
While the variable interest rate is 9.62% through October 2022, the fixed interest rate remains at 0%, according to the Treasury.
The fixed interest rate remains the same for the bond’s 30-year life, which means that someone who has bought I-bonds with a higher fixed interest rate can beat inflation for at least six months, Tumin explained.
Although the fixed interest rate has been 0% since May 2020, it reached a peak of 3.6% in six months from May 2000. You can see a history of both prices here.
How to buy I-bonds
There are only two ways to buy these assets: online through TreasuryDirect, limited to $ 10,000 per calendar year for individuals, or by using your federal tax refund to purchase an additional $ 5,000 in paper I bonds. There are redemption details for each one here.
You can also buy more I-bonds through companies, trusts or real estate. For example, a married couple with separate businesses can buy $ 10,000 per company, plus $ 10,000 each as individuals, for a total of $ 40,000.
Disadvantages of I-bonds
One of the disadvantages of I bonds is that you can not redeem them for at least one year, said certified financial planner George Gagliardi, founder of Coromandel Wealth Management in Lexington, Massachusetts. And if you redeem them within five years, you lose the previous three months with interest.
“I think it’s decent, but like everything else, nothing is free,” he said.
Another possible disadvantage is lower future returns. The variable portion of I-bond rates can be adjusted down every six months, and you may prefer higher-paid assets elsewhere, Gagliardi said. But there is only a one-year commitment with a three-month interest penalty if you decide to withdraw early.
Still, I-bonds may be worth considering for assets beyond your emergency fund, said Christopher Flis, a CFP and founder of Resilient Asset Management in Memphis, Tennessee.
“I think the I-bond is a great place for people to put the money they do not need right now,” he said, citing an alternative to a one-year deposit.
As of May 2, the average savings account return is below 1%, and most annual CDs are below 1.5%, according to DepositAccounts.
“But I-bonds are not a substitute for long-term funds,” Flis added.