By Jonnelle Marte
If you’re worried about inflation, I Bonds may not be the solution —at least not this year with interest rates so low.
Last year, the Internal Revenue Service rolled out a program that lets you use your tax refund to buy inflation adjusted Series I Savings Bonds.
More than 99,000 bonds were bought using tax returns in 2010, for a total of $11 million, according to the IRS. But that was last tax season, when the rate on I Bonds was above 3%. Today they earn 0.74%.
With the fixed rate on I Bonds currently at zero, analysts say there are more appealing ways to hedge against inflation. “It’s definitely not as exciting and sexy to want to do it,” says Alex Matjanec, co-founder of MyBankTracker.com.
You may be better off sticking with a certificate of deposit, says Matjanec. For instance, a 12-month CD with Ally Bank currently pays 1.29%, he points out.
Other ways to save: you can sock the money away in a high yield savings account or a traditional IRA, where your money can grow tax free until you retire, says Greg McBride, senior financial analyst for Bankrate.com. American Express offers a high-yield savings account that yields 1.30% annually, says Matjanec.
The yields on I Bonds are determined by two rates: a fixed rate that lasts throughout the life of the bond, and an adjustable rate that is reset twice a year pegged to inflation. The fixed rate on these bonds won’t be reset until May, and would only apply to new bonds. So investors who use their tax returns to purchase I Bonds now will lock in a 0% fixed rate, meaning they will earn nothing above inflation. (Investors who wait beyond May aren’t likely to see much of an increase on the fixed rate, says McBride.)
And you may even find yourself outpaced by inflation if you redeem the bond within the first five years, says McBride, because that would cost you a penalty of three months worth of interest.
That said, there are some tax advantages to I Bonds because they aren’t subject to state or local taxes. And you don’t have to pay federal taxes until you redeem the bonds, which could be held for up to 30 years.
The IRS expanded the program this year to let taxpayers purchase I Bonds for other people, as well as themselves.
Readers, are you worried about inflation? What do you think is the best way to put your tax refund to work?
Corrections & Amplifications: A previous version incorrectly reported the yield on the American Express 12-month CD.