Q: My financial adviser wants me to buy $10,000 I savings bonds at 7.12% until April?? I know it changes, and I would leave it there for a few years so as not to get penalized. Good idea? ... It seems to be a better deal than leaving the money in a savings account for little or nothing. JB
A: The quick answer: I bonds — U.S. Treasury Series I Savings Bonds — are a smart way to save money. Period.
Not long after receiving your question I got an e-mail with the "I Bond Manifesto." The Manifesto was published in September by six personal finance experts, including Zvi Bodie, finance professor emeritus at Boston University. Influenced by conversations about savings and I bonds with Bodie, I've long advocated for households to put some money into I bonds.
The recommendation has been something of a lonely position given that most financial planners, wealth advisers and other professional money managers routinely ignore them. That is, until now.
What changed? The 7.12% yield you mentioned, for one thing. The other reason reflects current concerns about higher inflation. I bonds are designed to protect savings from being eroded by inflation. To be clear, even if inflation rates fall in 2022 and the I bond composite rate tumbles, the savings bond will remain a terrific way for the typical middle-income household to save.
Among the attractions of I bonds mentioned by the Manifesto: They're risk-free; they protect against inflation; interest earnings are tax deferred; and no state and local government taxation is levied at redemption.
Your savings compounds tax sheltered for 30 years or until you redeem the bond. You can't cash in your I bonds for the first year. If redeemed before the five-year mark, you'll forfeit the three most recent months' interest. There is no redemption penalty after that. You'll pay federal income taxes on the gain when cashed in. You can buy up to $10,000 in I bonds yearly.
The interest on I bonds is a combination of a fixed rate that doesn't change for the life of the bond and the variable rate pegged to the Consumer Price Index. The composite rate for I bonds until April 2022 is 7.12%.
Finally, I bonds work well as a key component of your emergency savings fund, especially with rates on FDIC-insured savings accounts close to zero.
Chris Farrell is senior economics contributor to American Public Media's "Marketplace" and a commentator for Minnesota Public Radio.