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I bonds: What to know about this inflation-protected asset that is offering a 9.6% return

I bonds are long-term investments with a reliable return. Here's what you need to know.

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While rising inflation has its obvious disadvantages — hello, exorbitant grocery bills — the increase in prices of goods and services is making one investment more and more attractive: Series I savings bonds.

Otherwise known as "I bonds," these virtually risk-free investments already have a lot going for them: they're backed by the U.S. government, their value doesn't go down, they offer tax benefits and — arguably most appealing — they now pay more than 9% in interest a year. This high return is thanks to inflation.

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What you need to know about I bonds

Experts predicted that I bonds could offer a 9.6% annual return come May, based on March Consumer Price Index data that was released April 12, showing inflation has surged 8.5% year over year. While this was an estimated figure at the time, it turns out they were right on the nose. Investors can now buy I bonds at a 9.62% rate through October 2022.

I bonds benefit from the inflation surge as they pay both a fixed rate return, which is set by the U.S. Treasury Department, and an inflation-adjusted variable rate return, the latter of which changes every six months based on the Consumer Price Index. In other words, they can protect your cash against inflation.

Note that individuals can't buy I bonds through a brokerage account, only through the U.S. Treasury Department's website, and there is a limit to how much you can invest. You generally can't buy more than $10,000 in I bonds each year, plus an optional $5,000 extra if you put your tax return in paper bonds.

I bonds mature after 30 years, meaning you can continually earn interest on them for 30 years unless you cash them out first. While you can redeem them as early as one year after your initial purchase, cashing in early, specifically within five years, means you forfeit the last three months of interest earned. For tax benefits, you can defer declaring your interest until maturity or until you cash out.

What to consider before jumping in

Cashing in I bonds in fewer than five years means you'll be missing out on the last three months of interest, yet the return is so high that it's likely still worth doing compared to other savings vehicles like high-yield savings accounts and CDs.

Yet, it's important to note that I bonds are generally seen as long-term investments with a reliable return. Your money will be tied up in I bonds for at least one year, so if you're looking for something more accessible in the near future — as in, within a year — consider a short-term CD such as the three-month BrioDirect High-Rate CD or the six-month iGObanking High-Yield iGOcd®. Choose your CD term depending on how soon you need the cash. Another option is to go with a top high-yield savings account like the Marcus by Goldman Sachs High Yield Online Savings or other options from big banks, like a American Express® High Yield Savings Account* or a Barclays Online Savings account.

High net worth investors should also consider if an I bond makes that big of an impact on their overall portfolio, given the $10,000 maximum limit. If this is a considerably small amount, it probably doesn't make sense to open one.

Finally, if you want more liquidity and potentially higher returns (in exchange for taking on more risk), consider investing in stocks or index funds through a brokerage account like Fidelity or TD Ameritrade.

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*American Express National Bank is a Member FDIC

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.