With interest rates on most savings accounts and certificates of deposit paying under 1%, the 7.12% composite rate on newly issued Series I savings bonds is hard to ignore. The composite rate consists of a fixed rate, which is currently 0% on new bonds, and an inflation rate, which is based on the government’s consumer price index and adjusts every six months from the bond’s issue date.
Consumer prices rose 0.9% in October, up 6.2% from a year earlier, the largest increase in 31 years. Prices have risen across the board, affecting everything from eggs to TVs. Kiplinger forecasts an inflation rate of 2.7% by the end of 2022, down from 6.6% at the end of 2021, but higher than the average annual rate of 2% over the past decade. Remember that I bond rates reset twice a year, so come May 2022, that 7.12% will (likely) be knocked down to whatever inflation is then.
You can’t redeem an I bond within the first year. If you cash it in before five years have passed, the penalty is three months’ worth of interest—considerably less severe than the early-withdrawal penalties on most five-year CDs. Even if you pay the penalty, “you will still likely be far ahead of where you’d be if you just earned the standard interest rate on your bank savings account,” says Matt Hylland, a financial planner in Cedar Rapids, Iowa. A savings account or money market deposit account is the best choice for money you may need to access immediately, such as an emergency fund, but I bonds can fit well into a longer-term savings stash.
Each year, you can purchase up to $10,000 in electronic I bonds at treasurydirect.gov, plus up to $5,000 in paper bonds with your federal tax refund. You don’t pay state or local income tax on the interest, and you can defer federal income tax until you redeem the bond or it reaches maturity after 30 years.
Source: kiplinger.com