Here's how to invest risk-free money in government I-bonds at a return of nearly 10% before rates reset at the end of October

Because I-Bonds are issued by the US Treasury, they are essentially risk-free fixed income securities that protect investors from high inflation.

• There's still time to lock in a near 10% interest rate on inflation protected bonds from the US Treasury.
• I-Bonds have gained immense popularity this year given deeply negative stock market returns and high inflation.
• Here's how investors can buy I-Bonds before interest rates reset later this month.

I-Bonds issued by the US Treasury have gained immense popularity among investors this year as inflation has soared while stock market returns turned deeply negative.

The essentially risk-free government bonds offer both a fixed interest rate (currently 0%) and an inflation rate that changes every six months. That means this year, given that inflation soared to 9.1% in June, I-Bonds have offered an attractive alternative to investors compared to holding cash, bonds, or stocks. 

But with I-Bonds' inflation rate set to reset to a lower estimated rate of about 6.5% on November 1, investors need to purchase their I-Bonds security by October 28 to secure their current interest rate of 9.62%.

Here's everything you need to know about I-Bonds, and how you can buy them before their interest rates reset later this month.

Series I-Bonds were first issued by the US government in 1998, but they were never a popular option with investors given the attractive returns generated by both stocks and other bonds. On top of that, inflation had for the most part remained subdued in the low single digits for much of the time I-Bonds have been around.

But today's environment of elevated inflation, with monthly CPI prints often hitting 40-year highs, changed all of that.

Today's annualized interest rate of 9.62% for I-Bonds is the highest since November 2021's rate of 7.12%. Before then, the highest I-Bond rate was 5.70% issued in November 2005. 

Here's how to buy I-Bonds

In order to buy I-Bonds, investors need to open up an account with the US government's Treasury Direct website. This is an incredibly outdated website that is often plagued by bugs and downed maintenance periods during inconvenient times. 

Once your Treasury Direct account is set up, you can connect your bank account electronically and transfer money to make purchases.

How many I-Bonds can you buy?

Each tax payer is limited to purchasing $10,000 in I-Bonds per year. Additionally, each taxpayer can buy up to $5,000 in paper I-Bonds with your tax refund. Finally, a business can purchase up to $10,000 in I-Bonds as well. 

What's the downside?

The biggest downside to buying I-Bonds is the lock-up period. Any I-Bonds purchased must be held for at least one year before they can be redeemed. If you cash in the bond in less than five years of holding it, you lose three months of interest payments. After five years, I-Bonds can be redeemed with no penalty. I-Bonds have a 30-year maturity. 

The I-Bonds rate can also look at a lot less attractive over the lifetime of holding them if inflation falls back down to pre-pandemic levels.

Finally, I-Bonds cannot be purchased in retirement accounts like an IRA, and they are subject to federal taxes.

What's the risk?

Because I-Bonds are issued by the US Treasury, they are essentially risk-free fixed income securities that protect you from the rate of inflation. 

Having said that, there is one risk investors should consider when purchasing I-Bonds: opportunity cost.

Putting up to $10,000 in I-Bonds is attractive right now given their near 10% interest rate, but with stocks down 25% year-to-date, the argument can be made that despite the volatility, now might be a better time to buy stocks if you have a time horizon longer than a few years.

But stocks can be volatile and uncertain, and what is certain is I-Bonds' current 9.62% interest rate, hence their surging popularity this year.