Want to earn 7.12% on your emergency fund or other languishing cash?

An I bond is a savings bond just like the kind your grandparents may have given you on your birthday growing up, with a unique twist. Instead of providing only a fixed rate of interest the way traditional EE savings bonds do, an I bond also has a built-in inflation component that gets added every six months. That’s very valuable in today’s economic environment with inflation running around 5.4% or so.

See: Seniors get the biggest Social Security raise in years — and it’s already been eaten up by inflation

If you buy an I bond between November 2021 and April 2022, you’ll get a 7.12% rate for the first six months. That means if you put $100 into I bonds now, you’ll have about $103 six months later, and you’ll get a new interest rate after that, tied to the inflation rate at the time.

While I bonds are paying 7.12%, today’s average 12-month bank certificate of deposit rate is just 0.14% and money market savings rates average 0.08%.

What are the details about I bonds?

• An I bond keeps earning interest for 30 years
• You must hold an I bond for 12 months or more
• You can buy I bonds online through the government’s website TreasuryDirect.gov or you can buy paper I bonds using your federal income tax refund
• Electronic I bonds come in any amount for $25 or more; paper I bonds are sold in five denominations: $50, $100, $200, $500 and $1,000
• If you cash out within the first five years, you lose the prior three months’ interest
• Every six-month anniversary of your purchase, the I bond’s inflation rate is adjusted up or down
• Your I bond can never lose value
• You can only buy $10,000 in electronic I bonds per person per year and up to $5,000 in paper I bonds per person per year
• If you own electronic I bonds, you can redeem in the TreasuryDirect application; if you own paper I bonds, you can cash them at some local financial institutions or by mail
• You can’t hold I bonds in an individual retirement account (IRA)
• There shouldn’t be any fees from your investment adviser for buying and holding I Bonds

What about that early withdrawal penalty?

Some people are concerned about paying a penalty and losing the prior three months’ interest if they cash out of I bonds sometime after 12 months. But since you’ll earn today’s high interest in the first six months, your “penalty” won’t touch that, so your 12-month return will be at least 3.56% if you buy the bonds by April 2022.

Also see: Two ways to hedge interest rate risk

Why you may want to put I bonds in your emergency fund

Many people have an emergency fund; money they can access “just in case.”

Why not put a portion of your emergency fund money into I bonds, perhaps slowly at first (because you can’t touch it until 12 months), so your rainy-day funds will earn more interest than alternatives like bank CDs and savings accounts? If it turns out that CDs or savings accounts start paying a great rate of interest again — which doesn’t seem likely anytime soon — you could easily cash out the I bonds and switch your money back to bank accounts.

Related: What’s the safest place for retirees to keep an emergency fund?

Can I bonds replace other bonds in your portfolio?

Many people are concerned about other U.S. government and corporate bonds that now have low interest rates and could lose value after inflation and potential interest rate increases (when interest rates rise, bond prices typically fall). That’s why you could consider swapping in I bonds to replace some bonds you currently own that don’t offer inflation protection.

Since I bonds will never lose money, you won’t see any price fluctuations while you hold them and you can cash out without any drop in principal.

How to buy I bonds

Here are the nine steps to purchase electronic I bonds:

1. Go to TreasuryDirect.gov
2. Click “open an account,” choose TreasuryDirect, then “apply now”
3. Choose the type of account you’ll get, most likely a personal one
4. Fill in your info, including the bank account you’ll use to fund the account
5. Create your password and reminders (you’ll get your username soon)
6. Check your email, get your account number and go back to TreasuryDirect.gov to login
7. After you receive a “one-time passcode” by email, enter it on the Treasury site’s “virtual keyboard”
8. Once you’re in the account, click “BuyDirect,” then Savings Bonds — I bonds
9. Enter the dollar amount you want to purchase, how you want to do it (date and frequency for successive purchases or the date for a one-time purchase) and click submit.

Jeremy Keil is a Certified Financial Planner and chartered financial analyst who is a retirement-focused retirement planner with Keil Financial Partners. He is also host of the Retirement Revealed blog and podcast. See Keilfp.com for important disclosures.

This article is reprinted by permission from NextAvenue.org, © 2021 Twin Cities Public Television, Inc. All rights reserved.

More from Next Avenue: