It’s Boring and It Pays 0%: Here’s Why You Should Own It

photo: allyrose18

Want to hear about a great investment? It’s totally safe and tax-advantaged, it pays 0% interest, and…hey, come back here!

The investment I’m talking about comes from the US Treasury, and it’s called a Series I Savings Bond, or just an I Bond for short. It’s one of two types of US savings bonds currently sold (the other is series EE bonds). I Bonds really are great, in their own peculiar way, and here’s why you might want to own some, despite that 0% interest rate.

The real deal

The “I” in I Bonds stands for “inflation,” and an I Bond is guaranteed to keep up with inflation as measured by the Consumer Price Index (the CPI-U, for us nerds).

A 0% I Bond, therefore, will rise in value over time, as long as we have a positive rate of inflation, thanks to its inflation adjustment rate. Right now, that rate is 0.74%. The Treasury resets it twice a year to equal the rate of inflation. “Your return is going to be based entirely on inflation adjustments, and that is true for the entire life of the bond,” says Annette Thau, author of The Bond Book. (I Bonds are also safe from deflation, because the principal can never go down.)

That makes I Bonds basically the world’s safest, most boring investment. It’s like a government-insured mattress. Plenty of people are looking for exactly this sort of investment. You’ll never get rich off I Bonds, but you’ll never lose money, either. I Bonds don’t always pay 0%, either: the real rate on new I Bonds, just like the inflation adjustment rate, changes twice a year and will be adjusted next in May. (Changes in the real rate only affect new bonds, not any existing bonds you already own.)

But because Americans are still freaked out about the economy and worried about inflation, the government doesn’t have to pay any interest to convince people to buy I Bonds. In the past, the real interest rate on I Bonds has gone as high as 3.4%. Once you have an I Bond, you can cash it in after one year or sit on it for up to 30 years.

This ignores, of course, the debate over whether the government’s inflation numbers can be trusted. I think they can, and I’m going to explain why in a future column, but for now, let’s just agree that I Bonds are just as good at keeping up with inflation as any cost-of-living adjustments you might already be familiar with.

Furthermore, I Bonds are tax-deferred. If you have an I Bond sitting and increasing in value, you’re not taxed on it until you cash in the bond. And if you use the proceeds of the I Bond to pay for college, you’re not taxed at all.

Shopping at Uncle Sam’s bond emporium

On the eat-my-own-dogfood principle, I bought a $50 I Bond last week by shopping at the government’s TreasuryDirect web site. I will say two things about TreasuryDirect:

1. Once you’ve established an account and signed in, it’s a well-designed web site that lets you easily shop for savings and treasury bonds with no fees or markups and keep them in an online account where you can check up on them anytime. Hooray for government that works.

2. Establishing an account at TreasuryDirect and signing in requires following a security protocol that, as far as I can tell, was designed jointly by the TSA, the North Korean office of emigration, and some retired Berlin Wall architects. Just to log in, you have to type your (long and unpronounceable) password by clicking keys on an on-screen keyboard with your mouse. Then you have to look up some characters on a plastic security card which you receive by snail mail when you sign up. Then your webcam clicks on and you have to…okay, now I’m pulling your leg.

You can also order paper I-bonds from any bank, and they’ll be mailed to you. (The $50 I Bond features a picture of Helen Keller, who was also involved in designing the TreasuryDirect.com security protocol.) But it’s worth braving the barbed wire of TreasuryDirect, because keeping track of a piece of paper for years is even harder than using your mouse to type “ZC$&#Ggfe^.” Oops, now I have to change my password.

The downsides

A few caveats about I Bonds:

* They can’t be held in a retirement account. “401(k) and IRA should be maxed out before considering I Bonds” for retirement, says The Finance Buff, a pseudonymous blogger and author of Explore TIPS.

* There are purchase limits. An individual can buy up to $5000 in electronic I Bonds plus $5000 in paper I Bonds per year. (You can then go onto TreasuryDirect and convert your paper bonds to electronic. Attention comedians: have you considered doing a routine about how sometimes the government makes things more complicated than necessary? I smell laughs.) If you feel constrained by these purchase limits, I envy you.

* I Bonds are nontransferable. You can’t sell or give them to someone else once your name is on them. (You can buy them for other people as gifts, of course. The kids will say, “What the hell is this?” but they’ll thank you later. Maybe.)

* If you cash in an I Bond in less than five years, you’ll pay a small penalty (3 months interest, including interest due to inflation adjustments).

* The security goons at TreasuryDirect may or may not save your backscatter X-ray picture. Just kidding! Of course they’ll save it.

Again, I Bonds are not a “great investment” in the sense of “potentially lucrative.” You wouldn’t run and put all your money into I Bonds even if you were allowed to. They’re absurdly safe, dull, and easy to understand: they work like a CD, but you can’t lose money, even due to inflation, and can sit on it for up to 30 years.

Just don’t lose your TreasuryDirect password. You don’t even want to know what’s involved in getting a new one.