Money market funds and saving accounts pay almost zero percent interest these days. But these accounts are ideal places to put your emergency fund because they offer liquidity. Let’s say that you already have an emergency fund, and you are looking at investing your excess cash. You decide that you don’t want to invest that money in the stock market. Series I savings bonds are a great place to invest – your money will be safe, these bonds offer inflation-adjusted interest rates and taxes are deferred.
I Bonds – What You Need To Know
The interest rate consists of two parts – a fixed rate that will stay the same for the life of the bond and an inflation rate that is set twice a year – in November and April. You can check the total rate by going to Treasury’s I Bond website. Since the interest rates are partly tied to inflation, your money will retain its purchasing power over time.
Series I Savings Bonds Vs Money Market Funds
Unlike money market accounts, I Bonds are long-term investments. While money market funds offer immediate liquidity, SeriesI Bonds can’t be sold for the first 12 months. If you sell the I Bonds within the first five years, you will lose three months of interest.
The minimum holding period is 12 months. You can hold the Series I Bonds for up to 30 years.
Two ways to buy – TreasuryDirect (Electronic) and Paper Bonds
You can buy Series I Bonds electronically through treasurydirect.gov. An individual can invest a maximum of $10,000. In addition, you can invest $5,000 in paper bonds by directing the tax refunds for I Bonds purchase.
Couples can stash away $20,000 a year plus $5000 in paper bonds funded by your tax refund.
The tax on interest income Series I Bonds can be deferred until redemption. If you hold these bonds for decades, your money can grow tax-free for a long time. They are not subject to state or local income taxes.
If your using the income from the Bonds to pay for education, the interest income can be excluded from taxes. Check IRS form 8815 for income limits to qualify for the tax exclusion.
Series I Savings Bonds are a great place to put some of your money because they offer inflation-adjusted returns and tax deferral. Couples can invest at least $20,ooo a year in I bonds. Unlike your stock portfolio, these bonds are not volatile and will keep their value. These bonds are backed by the US Government and will allow you to sleep well at night.