U.S. Treasury Series I Savings Bond With 7.12% Interest

My sister asked me recently about a savings bond with a 7% interest rate. My first thought was that it was a pyramid scam offered by a sketchy investment website. If such a high interest savings bond existed, I would have half my money in it already. After some research, I found that such a savings bond truly exists and is backed by the U.S. Government.

The US Treasury Series I Savings Bond (a.k.a. I-Bond) does have a 7.12% interest rate, but comes with some caveats from major to minor:

1. The I-Bond interest rate is a composite rate, composed of a fixed rate and the inflation rate. The reason for the high 7.12% interest is because the current inflation rate is 6.2%. (Find out how the composite rate is calculated.)
2. The composite rate is revised every 6 months. The current 7.12% interest rate is good through April 2022. If you believe that the inflation rate will remain high in 2022, then the composite interest rate should remain high correspondingly.
3. The current fixed rate is 0% and applies for the life of the bond purchased.
4. Unfortunately, you can only buy $10,000 per year, per social security number, and per type of savings bond. So you cannot dump all your bank savings (with super low interest) into an I-Bond beyond $10,000. You can purchase up to an additional $5000 in paper I-Bonds using your income tax refund, but I didn’t look into it because I rarely get an income tax refund.
5. You cannot cash in your I-Bond in the 1st year.
6. Before the 6th year, you will need to pay a penalty (equal to 3 months’ worth of interest) if you redeem your I-Bond. I could not find details on which 3 months are selected, but I have a sneaky suspicion that it would be the 3 months with the highest interest rate since purchased.
7. You only pay tax on the I-Bond interest when you redeem it. As a result, you cannot purchase an I-Bond under your pre-tax IRA account.

A couple of the above points can be considered pros instead of cons. The I-Bond does offer some compelling benefits:

1. The inflation rate (used to calculate the composite rate) will never go below zero. As a result, with the fixed rate of zero, the composite rate will never go below zero. IMHO, this makes the I-Bond preferable to the Treasury Inflation-Protected Securities (TIPS) which could go negative.
2. The money in the I-Bond is as safe as your belief in the stability of the U.S. Government. For me, the money is considered 100% safe.
3. Upon redemption, the I-Bond interest is exempt from state and local income taxes.

All in all, I think the I-Bond is a great after-tax savings tool. Because it is indexed to the inflation rate, the power of your money (invested in the I-Bond) will never decrease. I plan to invest $10,000 every year.

If you have children, I recommend gifting them I-Bonds every year. Once they are an adult, they will have a sizeable nest egg courtesy of mom and dad.

How to buy an I-Bond

You can buy an I-Bond directly from the U.S. Treasury:

1. Browse to TreasuryDirect to create an account.
   1. Click on the “Open an Account” link.
   2. Select Individual account type. Submit.
   3. Input your info like name, driver’s license, address, email address, and bank account. Input your social security number as the “Taxpayer Identification Number”. Submit.
   4. Create your password.
2. When completed, you will get an email containing your TreasuryDirect account number.
3. Browse to TreasuryDirect and click on the “TreasuryDirect: Log in” link under the Individuals section. Then click on the orange LOGIN button.
   1. Input your TreasuryDirect account number.
   2. You will get an email containing your one time password (OTP).
   3. Input the OTP password from the email.
   4. Check the “Register computer” option so you won’t need to do the OTP again on your current computer.
   5. Type in your created account password using the virtual on-screen keyboard. Note that the upper case or lower case letters in the password does not matter because the virtual keyboard doesn’t support capitalization.
4. Once you are logged in, you can buy an I-Bond by clicking on the BuyDirect tab at the top.
   1. Select “I Series” under Savings Bond.
   2. Caution: Make sure you have enough money in your bank account!
   3. You can also schedule a purchase.

You can add your spouse and kids under your account by going to the ManageDirect tab. When purchasing I-Bonds for your kids, you can mark the purchase as a gift. This way, under account summary, you can clearly identifying your kids’ I-Bonds.

Again, I recommend purchasing I-Bonds yearly if you can afford to (after investing into pre-tax vehicles like 401Ks). I-Bonds are a great way to diversify your after-tax investments. I don’t see any downsides. At worst, it is better than putting your money into a bank savings account with a 0.5% interest rate.