Want to Earn 7% Risk-Free? There’s a Catch

Last month, the U.S. Treasury updated the interest rate for its Series I Savings Bonds. The new rate is 7.12%. The previous rate was closer to 3.5%.

This is a great yield for an investment that is considered to be risk-free. By comparison, most savings and money market accounts earn close to 0%. If you are willing to jump through a few hoops and are comfortable with the maximum allowable purchase, you should consider making this investment.

What is an I Bond?

An I Bond is a U.S. government savings bond tied to inflation. Since inflation has been much higher than usual lately, the yield of the I Bond has also risen. The yield resets every six months. The new yield will be based on the current inflation rate in May. If inflation remains high, the yield will stay high. If inflation moves lower, so will the yield.

Qualifications

A few qualifiers are important to note:

• You must open an online account with Treasury Direct. There is a way to purchase the Bond by filing your tax return, but that seems unnecessarily complicated. I was able to open an online account within a few minutes.
  
  
• You must hold the Bond for at least twelve months.
  
  
• If you sell the Bond before holding it for five years, you forfeit the most recent three months of interest. This is not much of a penalty, as you still will have easily outperformed other cash investments over the entire holding period of the Bond.

There is an annual maximum purchase amount of $10,000 per owner. This might be the biggest deterrent. For some people, the hassle of maintaining another account for recordkeeping and tax purposes might not be worth earning 7% for a relatively modest investment. On the positive side, the $10,000 limit is per owner per year, not per household.

• In addition, these bonds make great gifts to children. Still, each owner would need to establish an online account.
  
  
• We cannot help you set up the accounts. Bedel Financial cannot open accounts or purchase them in existing brokerage accounts.
  
  

How to Purchase?

Once you open an account online, you will enter your electronic banking instructions (bank name, routing number, and account number.) Next, go to the BuyDirect tab, select Series I, and follow the prompts. When titling the Bond in someone else’s name, you can indicate the Bond is a gift.

Once the purchase is entered, TreasuryDirect will transfer the purchase amount from your bank account on the following day, and the Bond will show up as an investment in your online account.

How to Redeem?

I am taking a leap of faith by assuming this will be easy. Several years ago, I redeemed savings bonds that were a gift from my grandmother through the TreasuryDirect program, and the process was straightforward. I selected the bonds to redeem, and the proceeds were moved to my bank account.

The process should be similar today.

The 7% yield is very attractive. It will probably change in May, but even then, the new yield will still likely be well above any other yields that you can get on cash alternatives. If you are comfortable opening an account online and the minimum annual investments, the I Bonds are a good investment.

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