Uncle Sam’s 7% Income Christmas Gift

| December 20, 2021
bonds

Those of us out in the real world, buying gasoline, bacon, Christmas gifts, and renting homes, understand that inflation is real and probably higher than the official government inflation number.

However, interest rates on fixed-income investments such as Treasury bonds and CDs remain very low.

One exception is the U.S. government’s inflation-linked savings bonds, which currently pay over 7%. And that rate will go higher if the rate of inflation goes even higher.

Specifically, I have the Series I Savings Bonds in mind. They currently yield 7.12%, and are the exception and an alternative to low-interest rates.

You purchase them through an account on the Treasury Direct website. Here are the features of Series I Savings Bonds:

  • Minimum purchase: $25. Maximum: $10,000 per year.
  • The rate you earn is a combination of a fixed rate and an inflation rate.
  • The fixed rate stays the same for the life of the bond.
  • The inflation rate resets every six months on May 1 and November 1.
  • The rate on your bond changes every six months from the date of purchase. For example, if you bought an I Bond on December 15, the rate on that bond would change on June 1. See table below.
  • Interest compounds every six months.
  • Savings Bond interest is exempt from state income tax.

Here are some factors to consider before investing in Series I Savings Bonds.

  • You cannot redeem a bond for at least 12 months after purchase.
  • If you redeem a bond before five years, you will be charged a penalty equal to three months of interest.
  • Interest only compounds to the bond’s value. You cannot have the interest paid out as earned.
  • If the official inflation rate declines, the interest rate on your bonds will decrease.
  • The current fixed rate portion of the rate is 0.0%. Hypothetically, there could be periods where your bonds earn 0% interest. Probably a good time to take that three-month interest penalty.
  • The $10,000 per year purchase cap limits how much of the I Bonds high interest rate money you can earn.

In conclusion, Series I Savings Bonds offer a safe, high-yield hedge against inflation at the current level, or even higher. These bonds would make great gifts for someone you want to help save money. But be aware: Series I Bonds tie up your money and reinvestment is the only option for earned interest.

This article originally appeared at Investors Alley.

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About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments, and 30 Day Dividends, a specialty income service that takes advantage of opportunities for relatively fast, attractive profits around potential dividend payouts.

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