Most investors are fully aware that the rates earned on cash today are less than a dismal amount. By the time you factor in yearly inflation, you are basically safely going backwards with your savings and money market accounts. If you are considering looking for a better rate of return on your cash, one interest Government program that is far too often overlooks is the use if I-Bonds as a cash reserve strategy.
Essentially, an I-Bond has two separate forms of interest rate within the bond. One part is a fixed interest rate of return which remains constant throughout the bond, and a variable rate based upon changes in the Consumer Price Index (CPI) that are announced each May and November. Currently, the overall interest rate on I-Bonds are 1.48% and they are exempt from state or local tax which can be a benefit depending on what state you live in at this time.
The good news about I-Bonds is that you cannot lose your money as they are U.S. Treasury securities backed by the U.S. Government. I-Bonds can never have an earnings rate that goes below zero, the redemption value of the I-Bonds cannot decline, and they can act as a hedge to protect you from deflation.
The bonds should be held for five years, but you can redeem them after 12 months, but you will lose the last three months of interest. Even though you lose several months of interest, you might want to compare the next numbers after tax against a one year CD. It may just be that the I-Bond is one of the best U.S. Government programs going that flies under the radar for most investors. Is it time for you to buy I-Bonds?
Written by: Ted Jenkin
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