6 Reasons to Consider Series I Bonds

6 Reasons to Consider Series I Bonds

Series I bonds deserve a look for almost everyone's retirement portfolio. These government bonds are guaranteed to increase in value every year at least at the rate of inflation, and each person can buy a total of up to $10,000 per year. Here are six reasons to consider investing some of your retirement savings in I Bonds:

You don't have to pay state or local taxes on interest income. I bond interest is federally taxed, but no state or local tax is due on this income. In high income tax states, the amount you can save on your income tax bill can be substantial.

The federal tax due can be deferred. Taxes are only due at the time of redemption. Since the maximum time you can hold an I bond is 30 years, you could potentially delay paying taxes on your interest income for three decades.

You can further reduce your tax liability if the redemption is used for education expenses. The Treasury poses income limitations and strict guidelines, but you could end up not having to pay any tax on your I bond income, just like investments in a 529 plan.

There are no commissions, ever. Since the government sells these bonds, you can buy them from many brokers or directly from the government for no commission at all. Even after you purchase the bonds, the financial institution you bought the bonds from cannot charge you a fee to maintain them in your account.

You are guaranteed not to lose principal. There are two components to I bonds: The first is a fixed rate of return, and the second is a semiannual adjustment for the inflation rate. For I bonds, the fixed rate, which follows the full life of the bond, will never change and is always a positive number. The adjusted inflation rate could be negative, but I bonds have a special feature that prevents you from losing money. In the event that we have deflation and the inflation rate plus the fixed rate is negative, then the combined rate gets adjusted to zero. The result is that your principal will never decrease from month to month, a feature that few investments have.

I Bonds have the explicit backing of the U.S. government. Though the budget ceiling crisis has called into question whether the country would pay its bills on time, these I Bonds are guaranteed by the full faith of the government, have the highest credit quality, and carry no default risk.

I Bonds cannot be redeemed for the first 12 months after purchase and any withdrawals in the first 5 years incur a 3 month interest penalty, so these are only for investors with at least a medium-term outlook. The fixed rate is currently 0 percent, but the total rate of return can still be quite respectable if you factor inflation into the equation. Retirement savers need to protect themselves from inflation risks, which makes these bonds a decent option.

David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.