I Bonds are the New Cash –  Kind of…

According to bankrate.com the average yield for a 1 year CD is 0.68% and the average money market savings account is earning an annual rate of 0.39%.  Your safest money is losing purchasing power, which is unfortunate especially if an alternative can be found without any additional credit risk.

A very competent alternative exists – I Savings Bonds from the U.S. Treasury are currently yielding 1.38%.  Currently I Bonds are paying a base rate of 0.2% plus the inflation rate adjusted every 6 months.  The base rate can change for future bond issuances but inflation adjustment will be consistent across all I Bonds regardless of issue month.

• Pluses
  The purchasing power of your cash is better protected against inflation
  Unlike CD’s taxes are not paid on interest income until the bond is redeemed
  State income tax free
  Bond proceeds used for education needs could make the interest earned tax-free (subject to various income and use constraints)
• Minuses
  You are locked-in for a year, kind of like a 1 year CD
  If you redeem the bonds during the first 5 years, you lose 3 months interest
  There is a bit of hassle to get it all set up and possibly a little more work to get at your funds when needed
• Logistics
  Invest online at treasurydirect.gov
  Maximum of $10k a year can be purchased ($20K for married couples)

I am recommending younger clients to work towards keeping their 6 month emergency cash reserves in I bonds.  I am encouraging older clients to have 1 to 2 years of anticipated annual spending needs invested in I bonds by the time they retire. These funds can be used as part of their fixed income allocation and also be a source of funds during downward markets in order to prevent selling other investments at possibly depressed prices.

Good I Bond primer straight from the US Treasury: http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm