Stressed Over Inflation? How to Earn 4.3% With This Risk-Free Investment (2024)

Series I bonds, an inflation-protected and nearly risk-free asset, have been widely popular with investors the past 18 months.

But on May 1, the new six-month I bond rate reset to 4.3%, down from 6.89%. That’s a steep decline from the headline-grabbing 9.62% rate investors enjoyed from May through November 2022.

I bond rates are tied to inflation, so as inflation cools, rates decline. And as interest rates rise, other safe investments — like certificates of deposit and even high-yield savings accounts — become more appealing.

So, are I bonds still a red-hot buy? Or are there better places to stash your cash?

Before you decide, here’s what you need to know about I bonds and how they work.

What Are I Bonds?

Series I bonds are an inflation-protected security sold by the U.S. Treasury Department.

Since I bonds are backed by the full faith and credit of the U.S. government, your risk of losing money is basically zero. (Historically, the U.S. government has never defaulted on bonds.)

How Do I Bonds Work?

The interest rate on I bonds adjusts twice a year (in May and November) based on changes in the Consumer Price Index.

The 4.3% I bond rate actually combines two different figures:

• A semiannual (twice a year) inflation rate that fluctuates based on changes in the Consumer Price Index.
• A fixed rate of return, which remains the same throughout the life of the bond. (It recently increased from 0.4% to 0.9%.)

While new buyers will enjoy a variable rate of 3.4% on these bonds for now, that rate can change after six months. It goes up or down based on the growth of inflation over the last six months.

But people who purchase I bonds between now and the end of October 2023 will enjoy an added perk: a fixed rate of 0.9%.

While the six-month variable rate is down, this is the highest fixed rate for I bonds since 2007.

That fixed rate doesn’t change over the life of the bond. So, if you purchase an I bond now, you will lock in that 0.9% fixed rate until the bond matures in 30 years or until you cash it out.

Why Did the I Bond Rate Go Down on May 1?

I bonds are tied to inflation, and inflation is still high. So why did the I bond rate drop 2.5 percentage points on May 1?

Because the variable rate on I bonds reflects the increase of inflation over the last six months — not the last year.

Inflation may be 5% higher than it was a year ago — but it’s not 5% higher than it was six months ago.

April 2023 saw the ninth-straight month of declining inflation on an annual basis, and it’s down significantly from a 9% high in June 2022.

You won’t lose money if the interest rate goes down though — you just won’t earn as much.

9 Must-Know Facts About I Bonds

While I bonds are virtually risk-free, they still come with rules and restrictions.

First, these are 30-year bonds. Your cash isn’t locked up for three decades, but you absolutely can’t access your money for at least 12 months. The government won’t allow you to cash out an I bond any sooner.

After a year, you can cash it in, but you’ll lose three months’ worth of interest if you cash out one to five years after purchase.

I Bond Fast Facts

1. I bonds are sold at face value (no fees, sales tax, etc.).
2. They earn interest monthly that is compounded twice a year.
3. The bond matures (stops earning interest) after 30 years.
4. You have to wait at least one year to cash in I bonds.
5. You’ll lose three months of interest payments if you cash in a bond one to five years after purchase.
6. Minimum investment is $25.
7. Maximum digital I bond investment is $10,000 per person, per year.
8. The value of your I bond will never drop below what you paid for it.
9. I bond interest is exempt from state and municipal taxes.

Speaking of taxes, you can choose to either pay federal income tax on the bond each year or defer tax on the interest until the bond is redeemed.

You may be able to forgo paying federal tax altogether by using the bonds for higher education costs. Your adjusted gross income needs to be under $83,200 for a single filer, or $124,800 for couples, to qualify for this education tax perk.

How to Purchase I Bonds

The fastest and easiest way to purchase I bonds is on the TreasuryDirect website. It’s a free and secure platform where you can view all your account information, including pending transactions.

You can also give I bonds as a gift.

Another option is buying I bonds at tax time with your refund. You can buy I bonds in increments of $50 this way. You don’t need to put your entire refund in bonds — you can earmark just part of it.

FYI: You can’t resell I bonds, and you must cash them out directly with the U.S. government. Also, only U.S. citizens, residents and employees can purchase these bonds.

Who Are I Bonds Right For?

There are a few ways investors can benefit from purchasing I bonds at the current 4.3% rate.

Scenarios When It Makes Sense to Buy I Bonds

• You’re worried about inflation and stock market fluctuations.
• You want to diversify your stock-heavy portfolio with a safe investment.
• You’re nearing retirement and are shifting your portfolio toward bonds.
• You want to save money for a child’s future college expenses.
• You’re saving up for a big purchase that’s at least a year away — like the down payment for a house — and want to earn a little interest on your cash in the meantime.

Because I bonds can’t be cashed in for a year, it’s important to keep enough money in your cash emergency fund to cover immediate expenses.

It’s also worth exploring other safe investments that might earn a better rate than I bonds. The best high-yield savings accounts, for example, offered rates of 4% to 4.3% in May 2023, and there’s no one-year waiting period to access your money.

I bonds won’t make you rich. But for everyday Americans, these investments offer a safe way to grow your cash and hedge against inflation.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.