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Why It Could Make Sense to Purchase I-Bonds Right Now
November 28, 2022 | By Tim Daly, CPA
With inflation at its highest level in more than 40 years and a volatile equity market that has decreased by double digits through November of 2022, many investors are looking for an attractive investment where they can park their money without it losing value. For some, that could mean a high yield savings account – as of November 2022, interest rates of high yield savings accounts are well over 2%. For others, it could be bonds – savings, municipal, or corporate – but some of those options don’t pay a great return either and most bond mutual funds have losses for the year thus far. So, it begs the question: Where can investors earn income at the prevailing inflation rate with minimal risk?
What Are I-Bonds?
I-bonds are a great option to get both an attractive return and limit the risk of losing your money. They are bonds that are a hedge against inflation, with a current annualized return of 6.89% on newly issued bonds as of November 2022.
Series I savings bonds are issued by the U.S. government and have interest rates applied to them that change every six months based on the rate of inflation. Individuals can purchase up to $10,000 worth of I-bonds in one calendar year, with an additional $5,000 available if you use your federal income tax refund to make the purchase.
An I-bond can earn interest for up to 30 years, but investors can cash out at any time after 12 months. In the event an investor decides to sell the I-bonds within five years of purchase, they will have to relinquish the last three months of interest earned on the bonds upon sale.
Who Can Buy I-Bonds?
Any U.S. resident, civilian, or legally employed person is eligible to purchase I-bonds. They can even be bought by people under the age of 18, trusts, estates, partnerships, and even corporations.
Annualized Return Rate
I-bonds begin to accrue interest on the first day of each month (applied to the month in which the bonds were issued). As of November 1, 2022, there is a new interest rate that will go into effect for any newly purchased I-Bonds (and any outstanding I-Bonds once it has been 6-months since the previous interest rate change). The rate for the next 6 months on any newly issued I-Bonds bought after November 1, 2022, is 6.89%.
Why is my I-Bond Rate different from that of I-Bonds issued after November 1, 2022? There are two components that make up the interest rate on I-Bonds: 1) Fixed Rate, and 2) Inflation Rate. The fixed rate is the rate stated on the bond when it is issued and will not change throughout the life of the bond. For I-Bonds bought after November 1, 2022, this rate is locked in at 0.4%. Before this, the fixed rate on I-Bonds had been 0% since May 1, 2020.
The inflation rate can be looked at as the variable rate associated with the bonds. This is the rate that will change every 6 months based on the rate of inflation in the economy. The new inflation rate is 6.48% for the next 6 months.
Every six months from the time the bond is issued, interest is added to the bonds principal value which creates the new principal value. Over the next six months, new interest that accrues is based on the new principal value.
Where can you purchase I-Bonds?
You can purchase I-bonds directly from the Treasury Direct website. The minimum purchase is either $25 (electronic bonds) or $50 (paper payment). In addition to buying your bonds on the Treasury Direct website, this site provides users with tons of helpful information on the bonds. Since they are bought through the treasury direct website, there are no commission or ongoing management fees.
I-bonds are not taxed on the state or local level, but they are taxed on a federal level. If used for qualifying education expenses, they may be able to avoid taxation all together.
Bondholders have the option of including interest income in the year it is earned or in the year that the bonds are sold or mature.
I-bonds are a great way for people of any age or financial status to earn income at the prevailing inflation rate (6.89% as of November 2022). They are also a great way to protect against inflation and uncertain market conditions.
The advisors at Wealthstream Advisors are here to help you make the best decision for your investment portfolio. Whether it pertains to I-bonds or any other asset class, our financial advocates have years of experience helping investors get the most out of their capital. If you’d like a consultation, don’t hesitate to reach out to us today.