Would you be interested in earning 7.12% annual interest on an investment that’s guaranteed by the U.S. government? And not lock up your money for years?

This is not a come-on nor is it a time machine to travel back to the good old days of higher interest rates. You can now buy Series I Savings Bonds, aka I bonds, directly from the U.S. Treasury that earn an annual rate of 7.12% per year. This rate is guaranteed on all I bond purchases made through April 2022. For most savers, that’s about 7% more than the rate they might be currently earning on savings accounts or CDs at banks.

The high interest rate isn’t the only advantage of I bonds. Here’s another: The interest isn’t taxed until you cash in your bond, so your savings grow at the full rate of the interest. Even better, the interest isn’t subject to state and local income taxes.

How is your interest calculated?

Your I bond interest rate is the sum of two rates:

  • A fixed rate, currently 0%, plus
  • A rate of inflation that currently results in the 7.12% interest rate

Your interest rate will change every six months. For example, I bonds purchased before April 1, 2022 will earn an annual rate of interest of 7.12%. Then, on April 1, the rate will be adjusted. Your account will be credited with the interest amount every six months.

Learn about key features

There are a few features you should know about I bonds. These aren’t deal-breakers—just features to plan around.

  • Each calendar year, an individual can buy up to $10,000 of I bonds online directly from the U.S. Treasury. A married couple together can buy up to $20,000 online each year.
  • In addition to the $10,000 or $20,000 you can buy every year depending on your marital status, you can also buy up to $5,000 more of paper I bonds using your federal income tax refund.
  • The interest amount on your I bonds is earned on the last day of each month and is credited to your account on the first day of the following month. So, the best time to buy an I bond is near the end of a calendar month, since you’ll earn a full month’s interest on the bond you purchase.
  • Your account will never lose money, and the interest rate will never drop below zero.
  • You can’t cash in an I bond within 12 months of purchase. So, you don’t want to buy an I bond with funds you’ll need to use in the 12 months following your purchase.
  • If you cash in the bond within one and five years of purchase, you lose the last three months of interest. This feature shouldn’t be a deterrent because even if you forfeit the last three months of interest, you’re still earning much more interest than you would with your bank’s savings accounts or CDs. There is no penalty if you hold an I bond for at least 5 years.
  • You can’t invest in I-bonds through a retirement account such as an IRA or 401(k) plan.

You buy I bonds directly on the TreasuryDirect website. This website also contains much more information on I-bonds and other government bonds you can buy.

Setting up our accounts earned us more than $1,000 per hour

It’s very easy to buy I bonds online. It took me a total of 30 minutes to set up my account, read the terms and disclosures, and buy my first I bond. We used money in our bank’s savings account that we were using for our emergency fund and other purposes. Having set up my own account, it will probably only take me 10 minutes to help my wife set up her own account and show her how to purchase an I bond.

I figure that for the time it takes for my wife and I to set up our accounts, in effect we’re earning more than $1,000 per hour.  Here’s how I made this estimate.

If I had left this money in my savings account at my bank, at most, I’d earn a few dollars of interest. At the end of six months, I figure I’ll earn at least $350 more in interest with my I bond investment of $10,000, compared to the interest earnings if I’d left our savings at the bank. If the current rate of 7.12% continues when the rate is adjusted on April 1, 2022, I’ll earn at least $700 more than my bank’s savings account would earn for the entire year.

But just for the sake of argument, let’s assume that my interest rate drops on April 1, 2022, so that my additional interest earned for the entire year is only $500, compared to my bank’s savings account. And if we assume that my wife also purchases an I bond worth $10,000, our total extra interest earned for the year will be about $1,000. All in under an hour’s work!

So, I ask you, for an hour’s worth of work, are you interested in earning $1,000?

Tip learned from experience

The TreasuryDirect website is a bit clunky and can be confusing to navigate, compared to commercial websites you might be used to. For example, if you use the forward or back arrows to navigate the website, you get kicked off. I had to learn this lesson a few times the hard way, which is why it took me 30 minutes to set up the account instead of a shorter period of time. So, it might take a little time and patience to persist until you succeed.

Low- and middle-income retirees need to squeeze every last dollar out of their savings, so here’s a great way to earn a little more spending change.