As everyday costs tend to rise, many savers may be looking for ways to protect their wallets, including their savings, against inflation.
The latest Consumer Price Index paints a grim picture for Americans at home as prices continue to rise. According to the most recent data from the Bureau of Labor Statistics, prices were 3.8% higher than a year ago (the largest annual increase in three years) and 0.6% monthly, driven largely by rising energy costs.
One way to protect against inflation: explore alternative savings options.
Read more: Six ways investors and savers can get ahead of inflation
What is a Series I bond?
Series I bonds are government-backed savings bonds linked to inflation. Each bond is issued at face value with a final maturity of 30 years, consisting of an original maturity period of 20 years followed immediately by an extended maturity period of 10 years.
The bond’s compound rate, or earnings rate, has a two-part structure: a fixed rate and an inflation rate. The fixed rate remains the same for the term of your bond, while the inflation rate can change every six months.
Savings bonds earn interest monthly and that interest is compounded semiannually.
Another benefit of these bonds is that, while they are subject to federal income tax, they are exempt from state and local income tax. Savers can choose whether to declare their earnings each year or declare all their earnings at once when they withdraw their bonus. Plus, if you decide to use your money for qualified higher education expenses, you may not have to shell out any taxes on those earnings.
Series I savings bonds issued between May 1, 2026 and October 31, 2026 currently offer a compound rate of 4.26%, with a fixed rate of 0.90%.
Savers can purchase I bonds electronically for as little as $25, up to $10,000 per calendar year, through a TreasuryDirect account.
Read more: How to protect your savings against inflation
The case to buy now
Series I bonds can be an attractive savings vehicle during periods of rising inflation because the combined rate rises along with inflation, giving savers built-in protection against rising prices.
These bonds also currently offer yields well above national averages for other savings vehicles. The national average rate for a traditional savings account is just 0.38%. Money market accounts and certificates of deposit (CDs) offer slightly higher national average rates: 0.57% for money market accounts and 1.53% for a 12-month CD, but this is still significantly lower than the current rate for a Series I bond.
If the inflation rate continues to rise, that could translate into even higher returns for bondholders. In 2022, Series I bonds reached rates of up to 9.62%. Unlike your average savings account or CD, investing in these types of bonds can offset the cost of rising inflation. However, this can be a double-edged sword. Because a portion of the rate is variable and tied to current inflation, the rate can drop significantly (sometimes to almost zero), meaning your returns could end up being lower than other investments.
See also: The best high-yield savings accounts and The best CD rates
The Disadvantages of Series I Bonds
These links are not without drawbacks and it is worth understanding the rules and limitations before committing.
These bonuses come with a mandatory lock-in period. This means that you cannot redeem an I-bond for at least 12 months after the purchase date. If there’s a chance you’ll need to tap into those funds sooner, I bonds aren’t the right choice.
Once that holding period is over, you can access your money, but doing so within the first five years of holding your bond would incur a three-month interest penalty.
There are also purchase limits to keep in mind. You can only purchase up to $10,000 in paper I bonds. Before January 1, 2025, you could purchase an additional $5,000 in paper I bonds with your tax refund for a combined maximum of $15,000 per year, but this option has been phased out.
How do Series I bonds compare to HYSAs and who should get one?
Series I bonds and HYSAs offer above-average savings rates, but differ significantly in terms of features and capabilities. If you’re the type of saver who values ​​liquidity and higher maximum deposits, a high-yield savings account may be the best option. The downside is that these accounts may also have monthly fees and the interest rates are not fixed and can sometimes be volatile.
Savers who value fixed rates and have longer-term savings goals that won’t require access to their money in the immediate term can benefit from the stability of a Series I bond; However, the $10,000 maximum limit could be a deterrent if you want to save a lump sum for a more expensive financial goal.
Ultimately, both savings options can be beneficial and are certainly worth considering now that inflation is on the rise again.
Read more: I Bond vs. High Yield Savings Account: Which is Better to Fight Inflation?