While inflation has its obvious disadvantages — hello, exorbitant grocery bills — the increase in prices of goods and services is making one investment more and more attractive: Series I savings bonds.
Otherwise known as "I bonds," these virtually risk-free investments already have a lot going for them: they're backed by the U.S. government, their value doesn't go down, they offer tax benefits and —arguably most appealing — they now pay almost 7% in interest a year. This high return is thanks to inflation.
What you need to know about I bonds
Investors can now buy I bonds at a 6.89% rate through April 2023, which is down from the previous 9.62% annual rate that was offered May through October 2022.
I bonds benefit from the inflation surge as they pay both a fixed rate return, which is set by the U.S. Treasury Department, and an inflation-adjusted variable rate return, the latter of which changes every six months based on the Consumer Price Index. In other words, they can protect your cash against inflation.
Note that individuals can't buy I bonds through a brokerage account, only through the U.S. Treasury Department's website, and there is a limit to how much you can invest. You generally can't buy more than $10,000 in I bonds each year, plus an optional $5,000 extra if you put your tax return in paper bonds.
I bonds mature after 30 years, meaning you can continually earn interest on them for 30 years unless you cash them out first. While you can redeem them as early as one year after your initial purchase, cashing in early, specifically within five years, means you forfeit the last three months of interest earned. For tax benefits, you can defer declaring your interest until maturity or until you cash out.
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What to consider before jumping in
Cashing in I bonds in fewer than five years means you'll be missing out on the last three months of interest, yet the return is so high that it's likely still worth doing compared to other savings vehicles like high-yield savings accounts and CDs.
It's important to note that I bonds are generally seen as long-term investments with a reliable return. Your money will be tied up in I bonds for at least one year, so if you're looking for something more accessible in the near future — as in, before a year's up — consider a short-term CD such as the three-month BrioDirect High-Rate CD. Choose your CD term depending on how soon you need the cash and keep in mind that shorter-term CDs offer lower returns in exchange for quicker accessibility.
BrioDirect High-Rate CD
All deposit products are provided by Webster Bank, N.A. ("Webster Bank"), an insured FDIC institution. BrioDirect is a sub-brand of Webster Bank. Webster Bank operates under the trade name BrioDirect. This trade name is used by, and refers to, Webster Bank, a single FDIC-insured bank.
Annual Percentage Yield (APY)
From 0.05% to 5.35% APY
Terms
From 30 days to 60 months
Minimum balance
$500 to open and start earning interest
Monthly fee
None
Early withdrawal penalty fee
Yes, early withdrawal penalties apply. See product disclosuresfor details.
Terms apply.
Another option is to go with a top high-yield savings account like the Marcus by Goldman Sachs High Yield Online Savings or other options from big banks, like a American Express® High Yield Savings Account* or a Barclays Online Savings account.
Marcus by Goldman Sachs High Yield Online Savings
Goldman Sachs Bank USA is a Member FDIC.
Annual Percentage Yield (APY)
4.50% APY
Minimum balance
None
Monthly fee
None
Maximum transactions
At this time, there is no limit to the number of withdrawals or transfers you can make from your online savings account
Excessive transactions fee
None
Overdraft fee
None
Offer checking account?
No
Offer ATM card?
No
Terms apply.
American Express® High Yield Savings Account
American Express National Bank is a Member FDIC.
Annual Percentage Yield (APY)
4.35% APY as of 12/14/2023
Minimum balance
Min balance to open = $0
Monthly fee
$0
Maximum transactions
No limits
Excessive transactions fee
None
Overdraft fee
None
Offer checking account?
No
Offer ATM card?
No
Terms apply.
American Express National Bank is a Member FDIC.
Read our American Express® High Yield Savings Account review.
Barclays Online Savings
Barclays Bank Delaware is a Member FDIC.
Annual Percentage Yield (APY)
4.35%
Minimum balance
No minimum balance to open, but for interest to post to your account you must maintain a minimum balance that would earn you at least $0.01.
Monthly fee
$0
Maximum transactions
Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D
Excessive transactions fee
You may incur a fee and your account may close if you violate the limit more than three times in a year
Overdraft fees
N/A
Offer checking account?
No
Offer ATM card?
No
Terms apply.
High net worth investors should also consider if an I bond makes that big of an impact on their overall portfolio, given the $10,000 maximum limit. If this is a considerably small amount, it probably doesn't make sense to open one.
Finally, if you want more liquidity and potentially higher returns (in exchange for taking on more risk), consider investing in stocks or index funds through a brokerage account like Fidelity or TD Ameritrade.
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*American Express National Bank is a Member FDIC.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
