Should You Buy Government Savings I-Bonds?

Savings Bonds

I-Bonds Purchase Limit Increased to $10,000

The annual purchase limit for government savings I-Bonds has been raised to $10,000; making them more attractive to investors. In the current low interest rate environment people are looking for yield, safety, and inflation protection for the savings. I-Bonds can provide all three.

What are I-Bonds?

I-Series Bonds are issued in electronic form by the U.S. Treasury and backed by the full faith and credit of the United States Government. The interest rate varies every 6 months based on a fixed rate set when the bond is issued, plus the annual inflation rate measured by the Consumer Price Index. The current rate from November 2011 to April 2012 is 3.06% based on a fixed rate of 0.0%

Advantages of I-Bonds

Small Minimum Investment –  May be purchased in any amount starting at $25.00

Inflation Protection – because the bonds are indexed to the Consumer Price Index your savings have some inflation protection.

Favorable Tax Treatment – I-Bonds pay no state or local taxes. Federal Taxes can be deferred until redemption or paid annually. No Federal  taxes are due on interest used to pay qualified higher educational expenses.

Safety – United States obligations are considered the safest in the world.

Avoid Fees and Commissions – There are no account fees or commissions, even for small purchases.

Disadvantages of I-Bonds

Maximum Purchases – I-Bonds are limited to purchases of $10,000 per year.

Minimum Holding Period – I-Bonds must be held for at least 1 year.

Interest Penalty – Bonds held less than 5 years will suffer a 3 month interest penalty.

How to Buy I-Bonds

I-Bonds are available only in electronic form from the Treasury Direct. Open an account at Treasury Direct. You will need a Tax I.D. number (SS or EIN), e-mail address, and bank account including routing number. Once your account is set up it’s easy to add to your account, even in small increments.

Government Savings I-Bonds should be considered as a savings option because of safety, competitive rates, small minimums, and inflation protection.