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Use I-Bonds for Inflation Protection

David Waring

Are savings bonds a good investment? Of the two types of U.S. savings bonds, EE and I series, we think the I-series savings bond is currently a great investment. Here's why:

--They protect you from inflation.

--They are a bargain compared to Treasury inflation-protected securities (TIPS).

I-bonds pay a floating interest rate equal to the rate of inflation (CPI-U). Inflation over the last 10 years has averaged around 2.5 percent. Should inflation continue at this rate for the next 10 years, the yield on an I-series savings bond would be about half a percent more than that of a 10-year treasury. However, many market gurus including Bill Gross are predicting a major increase in inflation over the next several years. If this happens, the yield on I-series savings bonds will be much higher than the 10-year treasury.

So why don't more people invest in I-series savings bonds? First, you cannot buy or sell them through your brokerage account. You have to set-up an account with the Treasury and you can only buy a maximum of $10,000 worth of I-bonds per year, unlike TIPS, which are available for sale on the open market. These bonds are called TIPS. Compared to TIPS. Still, I-series savings bonds represent a great value. Whereas a buyer of a 10-year TIPS bond will receive a yield equal to the rate of inflation minus half a percent, the purchaser of I-series savings bonds receives a yield equal to the rate inflation with no deductions.

Can I-Series Savings Bonds Lower Your Tax Bill?

Savings bonds are not like an IRA or 401(k), which enable you to put money into them and not pay income tax on the amount invested, but you do get the benefit of compounding returns (not paying taxes on income) until you redeem a savings bond. Additionally, savings bonds have one tax benefit that IRA's and 401(k)'s don't: the interest you earn is completely free from state and local income taxes. Also, as tax time approaches, remember you can elect to have your tax refund paid in the form of savings bonds instead of cash. Your taxes and your refund will be exactly the same amount regardless of the form of payment you take.

David Waring is co-founder of bond education website Learn Bonds. If you've watched a YouTube video on technical analysis or forex trading, you have probably seen one of the over 100 videos that he produced. His trading education videos have been streamed over 6 million times and counting.

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