What are I Bonds?
Recent high inflation has thrust Series I savings bonds, or I bonds, into the spotlight. If you haven’t heard of I bonds before, or only just heard of them recently, the reason is because the high inflation rate has made this savings vehicle much more attractive to some investors seeking to minimize the impact of inflation. I bonds purchased before November 2022 have a combined interest rate of 9.62%!
I bonds are savings bonds issued by the U.S. Treasury which makes them among the safest investments. The interest rate is set using a formula combining a fixed rate with an inflation rate which is determined every six months based on the Consumer Price Index for all Urban Consumers (CPI-U). This interest is added to the principal and then a new rate is calculated allowing it to compound over time. So, if you purchase an I bond before November, the 9.62% rate will be good for the first six months. In November, a new inflation rate will be calculated which will then be the rate for the next six months of your purchase.
Here are some additional details:
How much can you invest?
You can purchase I bonds electronically directly from the U.S. Treasury’s website: TreasuryDirect. You may purchase electronic bonds in any amount from $25 to $10,000 with a maximum of $10,000 in electronic I bonds each year. You can also use your tax refund to purchase up to $5,000 in additional I bonds each year. I bonds can only be purchased from the U.S. Treasury, not from secondary markets.
How long do you need to keep the bond?
I bonds can earn interest for 30 years unless you cash them out. You can cash out an I bond after 12 months, although you will forfeit 3 months of interest. To avoid this interest penalty you must hold the bond for at least 5 years.
Do you pay taxes on your earnings?
I bonds are exempt from state and local taxes but are taxable at the federal level. Interestingly, you may be able to claim a federal tax exclusion if the earnings are used for qualified higher education and you meet certain conditions.
Who should consider purchasing I bonds?
I bonds might be something to consider for those investors saving for intermediate needs or expenses – longer than a year. This might include people anticipating needing a down payment in a year or more or those saving for college education in the next few years.
Give us a call if you are interested in learning more about I bonds and whether current rates make them a good option for your financial goals. We’ve had a number of these conversations recently and are always happy to discuss options to help you meet your financial goals.