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Why It Could Make Sense to Purchase I-Bonds Right Now

July 7, 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 July 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 July 2022, interest rates of high yield savings accounts are around 0.75% to 1.25%. 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?

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 9.62% as of May 2022.

What Are I-Bonds?

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 May 1, 2022, I-bonds are earning an annual rate of 9.62% (and will stay that way until November 2022).

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.

Taxes

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.

Bond holders have the option of including interest income in the year it is earned or in the year that the bonds are sold or mature.

Conclusion

I-bonds are a great way for people of any age or financial status to earn income at the prevailing inflation rate (9.62% as of May 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.

 

 

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