MAllison10,

You wrote, Wouldn't I have to hold the Ibond for up to 5 years? I thought I read somewhere that if you cash the bond within 5 years you will have to pay a fee?

The holding requirements for an I bond are 1 year minimum (you can't cash out before then) and during the first 5 years you will loose the most recent 3 month's of interest as penalty. http://www.treasurydirect.gov/indiv/products/prod_ibonds_gla...

The current I-bond yield is 2.20%, which is an inflation component of 2.20% and a base rate of 0%. That still compares favorably against an Ally Bank 5-year CD, which currently pays 1.69% APY and has 90 days of interest lost as the redemption penalty. (Ally probably has the smallest early redemption penalty in the market and some of the best CD rates.) Between the two, the I-bond looks a little better if:

1. You are certain inflation will average no less than 1.69%,
2. You are certain rates will remain this low for another year, and
3. If you are certain you don't need the money for the first 12 months.

Honestly I think think an I-bond is a fair bet for cash that you need to hold for 3-5 years - if you can't afford to risk the principal.

Also despite what trader2012 said, you won't beat these rates with a checking account right now. Sorry. Short term, low risk, fixed rate income options suck at the moment.

- Joel