With stocks, bonds, and gold down year-to-date, along with inflation at a 40-year high, I-bonds have become quite popular for their current high interest rate of 9.62% (through the end of October). Sound too good to be true? Let’s take a deeper dive into what these I-bonds are and consider some of their features and limitations.
What exactly is an I-bond?
I-bonds, also known as Series I savings bonds, are issued by the U.S. Treasury and considered a low-risk investment. These savings bonds were first issued in 1998 to give investors inflation protection on their purchasing power, i.e., to protect money from losing value due to inflation. There are 2 components that make up the interest rate: a fixed rate and an inflation rate. The inflation rate is adjusted twice annually in May and November and is based off the previous 6 month reading of the Consumer Price Index (CPI). Therefore, as inflation rises, so will the interest rate on I-bonds.
Is this 9.62% for real?
So again, these interest rates are reset every May and November. For any I-bonds purchased from May 2022 through the end of October 2022, the first 6 months of interest will be based off the 9.62% annualized rate. For example, if you invest $1,000 today, your I-bond at the end of the first 6 months will be worth $1,048.10 for a gain of $48.10 or 4.81%. It is important to understand that this is indexed to the CPI and future interest rates could differ.
What are the limitations?
The maximum contribution is $10,000 per person per calendar year, and each person needs to set up their own account. There is also a minimum hold of at least 12 months before you can cash them in. There is no penalty if redeemed after 5 years, however if redeemed before 5 years, the penalty will be 3 months’ worth of interest. For example, if after the first year you decide you want to cash in your I-bonds, you will receive 12 months of interest less 3 months of interest as a penalty.
Is the interest earned taxable?
Another important feature to note is, like all securities issued by the U.S. Treasury, I-bonds are exempt from state and local taxes but taxable at the Federal level. Interest earned may also be completely tax free if used for qualified higher education expenses.
Why hasn’t Westfield Financial Planning loaded up client portfolios in I-bonds?
I-bonds are non-marketable securities, that is, they do not trade openly on the secondary market. As such, we are unable to buy them in client portfolios as we do traditional stocks, bonds, mutual funds, and ETFs. Regulations make this a do-it-yourself only investment and can only be bought and held electronically on the Treasury Direct government website. Keep in mind when it comes to investing, diversification is a very important component of building and maintaining wealth. These I-bonds should only reflect a small portion of your overall asset allocation.
Please click here for a detailed step-by-step guide on how to get set up with I-bonds.