I Bonds are still an attractive choice for numerous investors, writes Veronica Dagher for The Wall Street Journal.

Starting on November 1, these inflation-adjusted U.S. savings bonds will earn an annual rate of 6.89 percent for six months. Previously, when bought before October 28, I Bonds earned an annual rate of 9.62 percent.

Learning more about I Bonds will help you know when and how much of these bonds to buy while avoiding unnecessary penalties.

I Bonds

I Bonds are inflation-adjusted Series I savings bonds that are backed by the U.S. government. Every six months, the interest rate on these bonds is recalculated. The rate is a combination of a fixed rate and an inflation adjustment.

A $10,000 annual limit per person is imposed per I Bonds. I Bonds have a lock-up period of 12 months.

Where to buy I Bonds

Investors buy electronic bonds through an account they create on the TreasuryDirect website. They purchase paper bonds with their tax refund through an Internal Revenue Service program.

If you have an overpayment after having extended your tax return, you can choose to purchase I Bonds with this refund.

Fred Hubler, CEO of Creative Capital Wealth Management Group, which specializes in retainer based planning and alternative investments has been telling clients to buy I bonds for years. “Ever since the interest rate had become attractive,” said Hubler, “when appropriate we have suggested clients open an account for themselves and their children. One benefit of our retainer based planning, we are not forced to recommend they buy products from us, we can suggest they do things outside of us that would be to their benefit.”

Benefits of I Bonds

I bonds are just as safe as cash but yield a much higher rate of return. If you are comfortable with a 12-month lockup period, I Bonds are currently a great way to invest excess cash.

While I Bonds are held, there are no federal taxes due. You get the benefit of compounding interest every six months without having to pay federal taxes until you actually cash them out.

There are also no state or local taxes on the earned interest.

Interest and maturity

When an I Bond is cashed, interest is paid as a lump sum. You can cash out after 12 months however if you cash out in the first five years, you will incur a penalty equal to three months of interest.

I Bonds earn interest for up to 30 years.

Read more about I Bonds in The Wall Street Journal.

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