Clark's tips on Series I-bonds

I have had so many questions from listeners who are confused about Series I savings bonds. Series I (the "I" stands for inflation) have been a great savings device for most of us since they were created back in 1998. The confusion comes from the fact that what you earn changes every 6 months, and what you earn during those 6 months is based on when you bought your Series I bond.

Why?
Series I-bonds come with two interest rates. The first is a fixed interest rate that stays the same for as long as you own your bond. The fixed rate is set when you buy your bond. The second is the floating rate, which is based on the inflation rate in the country. The government resets that rate each May and November.

Series I-bonds that were purchased from 1998 through October 2001 are the best to have. They earn great rates and should probably be held for a full 30 years. That is because they earn somewhere between 3 percent and 3.6 percent (the fixed rate), plus the current rate of inflation. Right now that total is between 6.15 percent and 6.76 percent. That is the best rate on savings anywhere. Remember that the total interest earned changes each six months and will reset again in May.

If you bought your Series I-bond between November 2001 and October 2002, you are currently earning 5.13 percent. A good deal and worth holding on to for now.

However, those who purchased from November 2002 to the present are earning much lower current rates -- between 4.12 percent and 4.72 percent. Remember, the difference is based on when you originally bought your Series I-bond.

So, what should you do?
If you are someone who stays on top of every penny of your money and pays a great deal of attention to it, you might consider cashing in the Series I-bonds you purchased from November 2002 through one year ago if you have $500 or more in them. You will give up the last 90 days of interest, but then you will be free to put money into CDs. It is easy to find CDs that pay better than 5 percent interest with a $500 minimum purchase. A good place to compare is bankrate.com.

If you have less than $500 in series I-bonds, keep them. By the way, there is a cousin of Series I-bonds known as TIPS. TIPS, or Treasury Inflation Protected Securities, are a great deal for you to look at for your IRA. I have a TIPS mutual fund in my IRA that currently is earning 2.5 percent plus the inflation rate. That is a good deal and significantly better than the current offer of 1.4 percent plus inflation if you buy a Series I today. Vanguard.com offers the best TIPS fund in the country.

TIPS should only be bought inside an IRA because of our nation's weird tax laws. If you don't have an IRA or a Roth, ignore this as a savings option.<