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Are I Bonds A Good Investment

The U.S. government began issuing I bonds in late 1998. I bonds are advantageous because Certificates of Deposit are at their lowest interest rates in many years, and they offer no inflation protection, and are subject to state and local taxes. I bonds can earn interest for up to 30 years (depending on their date of maturity), and are sold in eight different denominations: $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000.

U.S. Treasury Series I Bonds can be sold any time after five years without penalty, and between one and five years after purchase with a loss of only the last three months' interest.

Series I bonds can be purchased in both paper and electronic format. The Treasury used to limit the total annual purchases by a single individual to as much as $60,000 per calendar year, but new rules recently limited purchases to $5,000 in electronic format, and also $5,000 in paper format per calendar year.

The interest rate on Series I bonds is changed twice a year (in May and November), and is composed of a fixed rate and a variable rate. The fixed rate remains stable for the entire life of the bond. The variable rate is calculated on the basis of the change in the Consumer Price Index for Urban Consumers (CPI-U). The variable rate is two times the CPI-U during its six-month period and changes every six months. The interest rate of I bonds is therefore the original fixed rate plus a number that corresponds with double the CPI-U during six months. Every six months the fixed rate amount remains stable and the variable rate fluctuates more or less depending on the state of the economy.

Another advantage of Series I bonds is that they are state and local tax free, and federal tax deferred. The rates on the Series I bonds are also closely equivalent to short-term tax free municipal bonds and variable rate notes.

I bonds can be bought and redeemed at many different financial institutions. They may also be available through an employer's payroll savings plan, plus anyone can download the order forms.

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