I usually get asked what to do with excess cash savings. I never really have a GREAT answer. Rates are just too low and the only way is to take some sort of risk.

Well in this limited case, not anymore.

Series I Savings Bonds through the US Treasury are now earning 7.12%. If you have excess cash that you don’t think you will need for at least a year (but ideally five years) then these are a good bet. There are a few caveats:

1. The rate is adjustable. It will not earn 7.12% forever but it is tied to inflation via the Consumer Price Index. So, if inflation continues out of control, then these bonds will benefit from higher interest payments. If inflation cools down, the rate on the bonds will decrease. It is a semiannual inflation adjustment.

2. You are capped on how much you can put in. There is a limit of $10,000 per person / per calendar year. Additionally, you can put them in a business name for an additional $10,000. Basically, as many Tax IDs you have are how many times you can buy one in a given year.

3. This is a 30-year bond. You must hold it for at least a year. At that point, the penalty to redeem is the prior three months of interest. After five years, there is no longer a penalty and the bonds can be redeemed at any time. My thought is that if you want to redeem it during the penalized period then it is likely because inflation went a lot lower — in which case, the penalty would be a lot lower.

4. The Government website that you need to buy them on is not the most friendly. You can find it on Treasury Direct. Remember, you are looking for the Series I Savings Bonds. You will need to create an account and then purchase them via ACH with your bank account info.

5. You can only name an individual as the beneficiary so they aren’t great for estate planning. You can title the bond in your Living Trust name but it counts toward your limit as an individual. If you’re married, you can still only do one more after that.

The interest is state tax-free. It is taxed on the federal level but you can defer paying the tax until you redeem the bond in the future.

This post is an excerpt from a private client newsletter on 1/16/2022.