by George Tucker

Created on: January 28, 2010

Series EE savings bonds are a reliable, low-risk savings product backed by the full faith and credit of the United States government. In a low interest rate environment Series EE savings bonds yield very little (just 1.20% in the first four months of 2010). Savers who want to earn more interest on their savings face a quandry: higher interest rate yield is associated with higher risk. So how can a conservative saver get more return without exposing herself to risk?

Fortunately, there are several alternatives to Series EE savings bonds that are also backed by the full faith and credit of the United States government that offer a higher yield at present. 

Series I Savings Bonds

As an alternative to Series EE savings bonds, Series I (often referred to as I-bonds) offer some interesting features. I-bonds have two interest components: a fixed interest rate set at issuance (currently a meager 0.3%) plus a variable interest rate based on inflation (currently 3.06%). I-bonds purchased between Nov. 1 2009 and April 30 2010 will yield 3.36% APR. The variable interest rate is derived from the consumer price index (CPI-U), a fundamental measure of inflation. Interest is posted on the first of the month. 

Series I savings bonds are intended to help preserve the principal from inflation risk. Even in a deflationary environment, the composite interest rate of an I-bond never goes below 0. 

Series I bonds can be purchased online at TreasuryDirect.gov or in person at a participating bank. Up to $5000 each of paper and electronic I-bonds may be purchased per person per year. Paper I-bonds have a serial number and can be re-issued if lost or destroyed. Electronic I-bonds may be purchased in any increment to the penny. Paper I-bonds have a minimum purchase of $50. 

I-bonds share some tax advantages with Series EE savings bonds. Interest earned is subject to federal income tax but this can be deferred until redemption or final maturity. Special tax benefits are available under the Education Savings Bond Program for those who use savings bonds to fund qualified education expenses. 

There are some restrictions on the redemption of Series I bonds: I-bonds must be at least one year old before they are elgible for cash-in. (During times of a declared federal disaster, Series I bonds may be redeemed within one year of purchase.) If redeemed within five years of issue, there is a three-month interest penalty. Series I savings bonds may be cashed in at your local bank. 

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