Conservative investors seeking an attractive return have limited options in today’s low-rate environment. However, one savings vehicle stands out: Series I Savings Bonds.

Series I savings bonds (I bonds) are a low-risk savings product you can purchase directly from the U.S. Treasury at the TreasuryDirect.gov website. I bonds earn an interest rate made up of two components: 1) a fixed rate (currently 0.0%); and 2) an inflation component determined by the six-month change in the headline consumer price index (currently 3.56%). The current 7.12% annualized composite rate applies to I bonds purchases between November 2021 and April 2022 for their initial six-month holding period. Individuals can purchase up to $10,000 per person per year in electronic I bonds and an additional $5,000 per person per year of paper I bonds via their tax return.

As we approach the end of 2021, a married couple has an opportunity to invest up to $40,000 in I bonds. Each spouse can purchase $10,000 before year-end 2021 and then buy an additional $10,000 each in early January 2022, for a total investment of $40,000.

I bonds earn interest for 30 years unless you redeem them. You are permitted to sell them after one year, although you will forfeit the previous three months of interest. After five years, you are allowed to sell your I bonds penalty-free.

The current composite I bond rate (fixed rate + inflation rate) is 7.12%. The fixed-rate remains the same for the life of the I bond. The semiannual inflation adjustment is determined by the rate of change in the headline CPI inflation rate between the rolling six months of March and September. The composite rate can never go below zero, even during rare periods when the inflation rate turns negative.

How do I bonds earn interest?

Interest on an I bond is a combination of two rates:

1. A fixed rate of return which remains the same throughout the life of the I bond
   
   and

2. A variable inflation rate which we calculate twice a year, based on changes in the nonseasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy (CPI-U for March compared with the CPI-U for September of the same year, and then CPI-U for September compared with the CPI-U for March of the following year).

Interest is earned on the bond every month. The interest is compounded semiannually:  twice a year, the interest the bond earned in the previous six months is added to the bond's principal value; then, interest for the next six months is calculated using this adjusted principal.

The interest and principal are paid to you when you cash the bond.

Source: U.S. Treasury

I bonds receive favorable tax treatment as well. Savings bonds are exempt from state and local taxes, except for estate/inheritance taxes. Interest earned on I bonds is subject to federal income taxes; however, you can defer reporting the interest until you redeem the bond. You may also receive special tax treatment when the bond owner pays qualified higher education expenses at an eligible institution.

Reporting the interest all at once at the end

Most people defer reporting the interest, putting it off until they are filing a federal income tax return for the year in which they receive what the bond is worth including the interest.

When electronic I Bonds in a TreasuryDirect account stop earning interest, they are automatically cashed and the interest earned is reported to the IRS.

You can see the interest on your IRS Form 1099-INT.

• If a financial institution pays the bond, you will receive a paper 1099-INT from that financial institution either soon after you cash your bonds or within the first two months after the end of the year in which you cash your bonds.

• If you cash electronic bonds in your TreasuryDirect account, your 1099-INT will be available early the next year in your account.

Source: U.S. Treasury

In an environment of zero rates, Series I savings bonds stand out as an excellent investment vehicle that provides conservative investors safety, liquidity, and inflation protection.