QCould you please explain the difference between EE bonds and I bonds? Which is the better investment at this time?

DIANE

AI'm a fan of U.S. savings bonds. These bonds allow your money to compound tax-deferred until they are cashed in. You buy them with after-tax dollars and you'll pay ordinary income taxes on the gain at redemption. There are no commission costs when buying or selling savings bonds. There is no credit risk with them, either. Bonds redeemed before the five-year mark forfeit the three most recent months' interest, but after five years there is no penalty at redemption. These are some of the main characteristics shared by both EE and I bonds.

The big difference between the two kinds of savings bonds has to do with the interest calculation. Rates for EE bonds issued after May 2005 carry a fixed rate of return. Bonds sold from May 1997 to April 2005 are based on 90 percent of the six-month averages of five-year Treasury securities. The I bond is specifically designed as a hedge against inflation. Its return is made up of two parts: a fixed rate of interest and a rate that adjusts to changes in the consumer price index or CPI.

Which do I think is better? Both are good parking places for safe savings. I lean toward the I bond because of its inflation protection. However, I am also comfortable that I might earn less on my money if inflation doesn't emerge. That's the price of owning inflation insurance.

You can learn much more about savings bonds and run all kinds of savings-bond calculations at www.treasurydirect.gov. It's the website of the U.S. Treasury for buying federal debt securities, including savings bonds. The information is comprehensive and the calculators are good.

My one complaint about savings bonds is the limits put on annual purchases toward the end of the previous administration. Savers can now buy a total of $20,000 in U.S. savings bonds. That's $5,000 in Series EE bought online and another $5,000 in Series EE bought as an old-fashioned paper security. Similarly, you can buy $5,000 in I bonds online and another $5,000 in paper.

In sharp contrast, before the turn of the year, individual savers could sock away a total of $120,000 in U.S. savings bonds. I thought it was a terrible move at the time and still do. The change makes it that much harder for individual investors to hedge a substantial portion of their savings against the risk of inflation. And many finance scholars advocate that inflation-indexed bonds should be the foundation of a long-term retirement portfolio. I hope the new administration will go back to the old rules.

Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org.