Inflation Protection: I Savings Bonds

by Annette Thau

I Savings Bonds are a vehicle for protecting fixed-income investments against inflation.

I Bonds are accrual securities, which means that you do not receive interest payments (coupon income) until you redeem the bonds. But taxes on interest can be deferred until the bonds are redeemed or until maturity-that is, for up to 30 years. In addition, interest income is exempt from state and local taxes.

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The earnings rate of I Bonds is a combination of two separate rates: a fixed rate of return, and a variable semiannual inflation rate. The fixed rate is set when the bonds are initially sold, and it remains the same throughout the life of the bond. But the semiannual inflation rate adjustment is reset every six months, based on the CPI-U.

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