I Bonds

I Bonds are inflation-protected cousins of the more familiar Series EE Savings Bonds. I Bonds are sold at full face value (unlike EE Bonds which sell at half their face value).

More importantly, I Bonds are adjusted for inflation on a semiannual basis. If the inflation rate rises, the interest you earn on your I Bond will increase by a commensurate amount.

I Bonds are very affordable - you can invest as little as $50 or as much as $30,000 per year. Like other Treasury securities, they are backed by the full faith and credit of the US government.

An attractive characteristic of I Bonds is that they can never decrease in value. Interest is earned on the first of each month and compounded semiannually. As with zero coupon bonds, you receive no periodic interest payments. Instead, your initial investment plus interest is paid out in a lump sum upon redemption.

Although I Bonds can be redeemed any time after six months of issue, they are intended to serve as long-term investments. The government has therefore imposed an early redemption penalty of three months' interest if they are held for less than five years.

I Bonds reach maturity at 30 years after issue, at which point they stop paying interest and should be cashed in. I Bonds are tax-friendly and are therefore ideally suited for taxable accounts. They are exempt from all state and local taxes. The interest earned is subject to federal income tax, but only upon maturity or redemption.

In other words, I Bonds grow tax-free until you cash them in. They are also eligible for tax benefits when used for qualified education expenses. You can purchase I Bonds with a credit card directly from the US Treasury (at http://www.savingsbonds.gov/ols/olshome.htm). You can also buy them through your bank or other financial institution.

If you're a compulsive sort, you should buy I Bonds at the end of the month because you'll receive interest for the entire month in which the bond was purchased.

The current interest rate for I Bonds bought before May 2002 is 4.40%. This rate is re-set twice a year in May and November.

I Bonds can serve as an excellent vehicle for augmenting your retirement savings, as long as you don't mind some ribbing from your risk-prone friends about investing in saving bonds.

April 1, 2002

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