This vehicle protects against the devastating impact of inflation on fixed income investments.
I Savings Bonds are accrual securities, which means interest income payments are not received until the bonds are redeemed or mature (up to 30 years). Federal income tax on the interest can be deferred until redemption or maturity. Also, the interest is exempt from state income tax.
The interest rate is a combination of two separate rates: a fixed rate of return, and a variable semi-annual inflation rate based on the CPI-U. In the unlikely event of deflation, the value of the bond remains at its pre-deflation level. Moreover, because they do not trade in the secondary market, their value never decreases.
As a result of being structured as long-term investments, there is a three-month interest penalty if redeemed within five years of purchase.
I Savings Bonds are very attractive for retirement savings outside tax-deferred accounts, and, as an added bonus, they qualify for the education tax exclusion.
