I bonds are a tax-deferred investment that is guaranteed to keep up with inflation.

I bonds are inflation-protected savings bonds issued by the U.S. government. This option is one of the safest ways to invest because it is guaranteed by the U.S. government to never lose value. Here’s why many people use I bonds to supplement their retirement savings:

Rates. The interest rate for I bonds is actually a combination of two rates. The fixed rate is announced every six months, and all bonds purchased in the period have that baseline rate. Currently the fixed rate is zero. The variable rate is adjusted for inflation and is announced every six months.

Tax advantages. The interest accrued is tax-deferred until the time of redemption. It is also exempted from state and local tax. If you use the I bonds for educational expenses and your modified adjusted gross income is below a certain threshold, then you won’t have to pay tax at all.

Limitations. You have to hold I bonds for at least one year before you redeem them. If you cash them out within 5 years of the purchase date, then you’ll lose the last 3 months of interest. Each U.S. resident with a Social Security number can buy up to $10,000 of electronic I bonds per calendar year. In addition, you can use your tax refund to buy up to $5,000 of paper I bonds.

Where to buy. You can buy electronic I bonds directly from the U.S. Treasury via Treasury Direct. If you want to use your tax refund to buy I bonds, you need to tell the IRS when you file via the allocation of refund form.

Who should buy I Bonds. I bonds are a great savings vehicle that is guaranteed to keep up with inflation. Here’s how to tell if your portfolio would benefit from the addition of I bonds:

Maxed out tax-advantaged accounts. If you maxed out your 401(k) and Roth IRA contributions, then you are running out of tax-advantaged investment options. I bonds are tax-deferred, so you won’t have to pay tax on the interest until you redeem them. It’s a great way to defer paying tax until after retirement when you are in a lower tax bracket.

High state or local taxes. Some states have a nearly 10 percent tax rate, and investing in I bonds is one way to reduce your tax liability if you live in a state with high income tax.

Too much stock. The stock market has gained quite a bit this year. Your asset allocation is probably a little out of whack if you haven’t rebalanced lately. Buying I bonds is one safe option to rebalance your portfolio with a little more bonds.

You plan to retire early. I bonds have no age-related penalty, so you can redeem them at any time after 12 months. You can use your I bonds for living expenses until you can withdraw from your retirement accounts without penalties beginning at age 59 1/2.

You have too much cash in your savings account. If you like having accessible cash in your savings account, but you would like to earn more interest, then I bonds can be a good fit for you. I bonds have better interest rates than most saving accounts and CDs. You can move a portion of your savings account to I bonds and earn more while deferring tax.

I’m planning to buy some I bonds every year until I’m fully retired. You can start investing with just $25 through Treasury Direct.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.