There is a type of US Treasury bond called an I-Bond which pays an interest rate pegged at the current rate of inflation, now 9.62% (as of May 2022). This is a great, guaranteed rate of return, but there are some important limitations and complications.
- The rate varies every six-months. It is high now, but over time, it might revert to a much lower rate.
- You buy them directly from the US Treasury, or using a US income tax refund.
- You are limited in the amount of annual purchase: an individual can buy up to $10,000 per year (a couple could buy $10K each, but in the two names individually, not jointly) and using a US tax refund up to $5K. So a couple could purchase $25K per year max.
- Liquidity: you must wait at least 12 months before redeeming them, and will lose 3 months interest if redeemed in less than 5 years.
- Your account at the TreasuryDirect website is somewhat cumbersome to use. You buy the bonds as an individual, but you can name one beneficiary only. You cannot hold these bonds in an investment account at TD Ameritrade or Fidelity, for instance. The site is not very user-friendly; plan to spend some time understanding how the site works. Make sure you include these accounts in your estate plan.
- Tax: the interest is taxable at the US, but not at the state. You can decide whether to pay the tax each year, or wait until they are redeemed, for example, years from now. You cannot switch from one method to the other. The tax-deferral feature can be a benefit, depending on your situation.
While these bonds are quite attractive now, they have not paid much in recent history because inflation was quite low. They under-performed the overall bond market for years. Now they are out-performing the bond market.
While these bonds have limitations and are can be somewhat complicated, they provide very nice returns now, and if inflation stays high for a prolonged period, will continue to pay good rates.
This information is of a general educational nature and not investment advice. Past performance is no guarantee of future returns. Investing involves the risk of loss. A diversified portfolio does not guarantee a gain or protect against a loss. Information in this post is believed to be accurate but may contain inadvertent errors.