Very High Yields on Very Low Risk Bonds?

#Lifestyle Wealth

Rarely can you present an investment idea to clients that will earn them a strong return and be extremely low risk.

But that opportunity appears to exist right now, in the form of Series I savings bonds that currently pay 7.12% annualized yield and are as safe as any other investment out there. Are they too good to be true? Here is what your clients will love, like and dislike about these bonds, and what they should know before they buy.

The Great

You read that interest rate correctly. The annualized interest rate on Series I savings bonds is 7.12% from Nov. 1 to next May 1. Better yet, that interest is exempt from state income taxes.

Even better yet, the clients can choose to declare the interest (and pay the corresponding taxes) each year, or when the bonds are cashed in or mature (whichever comes first). So, it becomes almost like a tax-deferred annuity, where clients in high income tax brackets now can defer the taxation on the interest until retirement, when their tax bracket is likely to be lower (and their need for the money in the bonds higher).

Like Treasury bills, notes and bonds, Series I savings bonds are guaranteed by the “full faith and credit of the United States government,” which as a credit risk still ranks near the top in terms of safety and security. But unlike Treasury securities, Series I savings bonds aren’t bought and sold on the open market. Clients can redeem the bonds at almost any time, with little or no loss of principal or interest.

The Good

Series I savings bonds technically have a 30-year maturity, but your clients won’t necessarily be stuck with them until 2051. It’s difficult to get the money out within the first 12 months of deposit. But after that period, an early withdrawal of before maturity will incur a penalty of only three months’ worth of interest. After five years of ownership, there is no penalty at all for an early withdrawal of the principal and interest.

Some clients may be able to completely avoid taxation of savings bond interest. If the proceeds are cashed in and then used to pay for qualified higher education expenses of the owner or a dependent in the calendar year of redemption, the applicable interest is tax-free. The owner of the bonds must be 24 years or older when the bonds are purchased. Their modified adjusted gross income has to be at or below IRS limits for the exclusion that apply in the year of redemption (for 2020 that maximum figure was $97,350 for single filers and $153,550 for married couples filing jointly). Consequently, clients might want to complement money deposited to 529 plans (and invested in stock funds with higher potential risk and reward) by buying savings bonds each year as well. To learn more about the education tax exclusion, see Form 8815 at

Speaking of buying savings bonds for others, your benevolent-but-conservative clients may also want to purchase these bonds for the benefit of children or grandchildren. The Treasury even has created a relatively-helpful instruction sheet and video, along with a variety of gift certificate templates the client can use to make the recipient aware of the gift.

A couple of caveats on buying savings bonds for others: if the bond is bought using the child’s name and Social Security number, that bond is the child’s to use as they please. Because the bond is the child’s asset, it could negatively-affect any need-based higher education financial aid for which the child might otherwise qualify. And if the child is under age 24 at the time of the savings bond purchase made in their name, the bond proceeds are not eligible for the higher education expense tax exemption.

The Okay

The interest rate on Series I savings bonds is tied to the Consumer Price Index, and reset every six months on May 1 and Nov. 1. For better or worse that amazing rate of 7.12% can decline (or rise) at the next reset date, and every six months thereafter. Although the rate can (in theory) go as low as zero, it’s unlikely to do so in the near future, especially if inflation remains elevated. Therefore, these bonds can serve as effective inflation hedge for clients who are worried about rising prices and/or interest rates.

The Drawbacks


Excited clients might deflate a little when they find out that they can only purchase $10,000 face value of Series I savings bonds per person, per calendar year.

However, they may also be able to use a portion of any federal tax refund to purchase an additional $5,000 face value, so if they have withheld an excess in federal taxes during this year, they can steer up to $5,000 of that coming refund to buy more bonds (see Form 8888 at Plus, if you get the word to your clients quickly, they can buy up to $20,000 of the bonds per person over the next few weeks--$10,000 before Dec. 31, and another $10,000 right after Jan. 1.

The bonds can’t be bought in IRAs or Roth IRAs, so using them in any retirement accounts is not an option.

And that brings us to the “last but certainly not least” of the downside of Series I savings bonds. They are only issued in digital form and can only be purchased and stored online by going to Once there, clients will be required to establish an account, provide a drivers license or other form of identification and provide a bank name and account number from which the funds used to purchase the bonds will be drawn. Those clients who are less patient, tech-savvy or trusting of submitting sensitive financial information online might, understandably, give up at this point. But those who power through will find that subsequent purchases of savings bonds are easier than the initial process, and those future purchases will help them accumulate a safe, relatively-liquid stash of inflation-protected cash.

Kevin McKinley is principal/owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of Make Your Kid a Millionaire (Simon & Schuster).

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