With the announcement that the variable interest rate on I-Bonds is going up to 9.6% from May to October (as far as I know we are still waiting to see if the fixed rate will remain at 0% or bump up a little) there is a lot of interest in them.
Pro's:
You can purchase them easily directly from the US Treasury at treasurydirect.gov.
I-Bonds can be purchased for as little as $25. and in increments of $.01 thereafter, so are incredibly affordable
Interest accrues on the bonds but you decide if you want to pay taxes on the interest yearly or wait until you cash the bond in.
Interest earned on them is exempt from state & local taxes (if you are subject to the AMT then that may not be completely true)
They encourage long term savings (and exposure to the bond market) because you are required to hold them for 1 year and penalized 3 months interest if you cash them in within 5 years.
Con's:
You must hold them as per the previously mentioned time periods, so the funds are not easily accessible. Therefore, I usually advise that people only put funds into them that they know they won't need in the near term.
The interest accrues, rather than being paid to you directly, so to benefit from the interest gains you have to cash in the bond (i.e. they can't be used as a source of fixed income).
Tips:
Rather than putting a lot of money in an I-Bond all at once, another strategy is to stagger your purchases. For example, instead of putting $1,000 in at once you could buy $200 every three months. Then, once you cleared the 5-year period (or the 1-year if you didn't mind taking the penalty) you would have pockets of funds available to tap into every couple of months.
These can often be good introductory bond investments for cautious people, provided they understand that they should view them as long term.
David Maurice Sharp is a Financial Literacy Educator and author of The Thriving Artist.