Series I Savings Bond

The Series I bond was issued first in 1998 by US Treasury with the objective of allowing investors to guard against possible inflation.

Unlike the Series EE bonds, which pay a fixed interest rate until the maturity date (that rate was linked to 5-year Treasury notes until last May), I bonds guarantee a small fixed rate (1% at present) for the lifetime of the bond plus an additional variable part of the rate linked to inflation via the Consumer Price Index. A new indexed rate is announced every 6 months, in May and November. As inflation rises, so does the variable part of the interest rate, or vice versa. Right now, Series I savings bonds are paying a combined annual rate of 6.73%, down from five years ago, but still much better than savings accounts and CD's. By comparison, the current rate of EE savings bonds is only 3.2%.

Here are a few more details: (i) Both bonds can be bought with as little as $50 at most of the banks. (ii) With both type of bonds, the interest is exempt from state and local tax (iii) No penalty on redemption of bond after 5 years (iii) The federal tax on it need not be paid until you redeem the bond and collect the interest. (iv) If you use the bonds to pay college tuition you may not have to pay federal income taxes at all, no matter when you use it.