Series I bonds can be a smart, frugal choice

For conservative investors who want to protect their capital and receive some appreciation that beats inflation, the United States government offers two attractive bond options: Series I bonds and Treasury Inflation Protected Securities savings bonds. For both of these bonds, the U.S. Consumer Price Index is used to compute the inflation rate used to determine the interest paid. In this column, I will focus on the Series I bonds.

Series I bonds pay interest based on two components: a fixed rate and an inflation rate. The fixed rate today is 0.5%. The inflation rate is variable, reset every six months from the time the bond is purchased, and is based on the CPI in the sixmonth period ending one month prior to the reset time.

The bonds have a 30-year maturity. During deflation — that is, when the inflation rate is negative — the fixed rate portion could be wiped out, but the combined rate cannot be below 0%, which means your principal is protected. When interest rates are higher, the fixed rate is higher. If inflation rates increase, in general, the fixed rate will increase.

For the period ending May 2019, the fixed rate was 0.5% and the variable rate was 2.32% for a combined rate of 2.82%. Prior rates are available from the U.S. Treasury Direct website (treasurydirect.gov).

You may invest up to $10,000 per year in Series I bonds electronically through treasurydirect.gov. However, if you have under-withheld your federal income taxes, you may use your IRS refund only to purchase additional paper Series I bonds up to a limit of $5,000 per year. All purchases are made through the U.S. Treasury. Redemptions can be made either through the U.S. Treasury or from a local financial institution. There is no secondary

market for these bonds.

You will be able to redeem the bonds only after you hold them for one year. If you redeem them within five years, you lose the interest earned in the three months before redemption. Accordingly, you should not be looking at these bonds as a shortterm investment.

If you expect to need these funds within a year, you should consider Treasury bills as an alternative for a conservative investment.

Increases in the value of these bonds are not taxable at state or local levels. Gains are taxable on your federal taxes. However, when you purchase these bonds, you have the option to pay taxes on an annual basis, or you can postpone your tax liability until you redeem the bonds. Naturally, your decision should be based on both your current tax situation and your anticipated marginal tax rate at redemption time.

If you anticipate using the proceeds to fund your children's higher education, there may be additional tax advantages. Details are available at treasurydirect.gov (search for education planning). In order to have a tax advantage, the bonds must be redeemed the same year as the education expenses are incurred.

To sum up, Series I Bonds have a lot of great advantages: possible tax deferral, possible tax advantage for higher education expenses, principal protection, inflation protection, a fixed rate of return, and no sales commissions for buying or redeeming.

On the other hand, the fixed rate of return is low. Inflation adjustments are made only twice a year. You can't sell them on the secondary market, and you'll get a low return if you hold them for a short term.

In other words, Series I savings bonds are not a substitute for equities with growth potential. However, if principal protection and inflation protection are your foremost goals, you can consider this option. See www.treasurydirect.gov for more information regarding Series I Savings Bonds and TIPS bonds.

Elliot Raphaelson welcomes yourquestions and comments at raphelliot@gmail.com.