Ask the Fool I Bonds Explained

Q:

What are the advantages and disadvantages of I bonds? - J.J., Portland, Maine

A:

I bonds are savings bonds offered by the federal government, with interest payments adjusted to keep up with inflation. They are attractive because of their limited risk (the U.S. government is not likely to leave town overnight), tax advantages (you are taxed on their interest only when you cash them in), small investment amounts (as little as $50), and protection against inflation. Interest can even be taken entirely tax-free, if it is used for education.

On the downside, you will lose some moolah if you cash out early (within five years), and over the long haul, money tends to grow faster in stocks than in bonds. In fact, long-term money can grow twice as rapidly in stocks. According to Ibbotson Associates Inc., between 1925 and 2004, stocks grew at an annual average rate of more than 10 percent, while bonds grew about 4 percent to 5 percent.

I bonds can protect your money, but they are not likely to make you rich. Learn more about bonds at

» READ MORE: www.bondsonline.com

and

» READ MORE: www.investinginbonds.com

. Note that some corporations, such as Sallie Mae, Fannie Mae, and Protective Life Corp., have also issued inflation-adjusted bonds.

Q:

How can I find out whether my former employer is covered by the Pension Benefit Guaranty Corp.? - P.S., Seattle

A:

The Pension Benefit Guaranty Corp. is a federal agency that protects pension benefits in private traditional pension plans (but not defined-contribution plans, such as 401(k)s). Note that if it takes over your employer's pension plan, you may receive reduced benefits, as it does not cover health and wellness benefits, for example. Learn more at

» READ MORE: www.pbgc.gov

or by calling 202-326-4000.