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I-Bonds

04/19/2022
I-Bonds: A Low-Risk Inflation Hedge
close up savings bond
With inflation continuing to increase, some people are looking for investments that have higher returns with low risk. Typically, less risk often means lower returns. However, that is not the case with government-backed inflation protected I-bonds. Utilizing I-bonds is an avenue investors can use to take advantage of extremely competitive interest rates without taking on more risk. While rates have been dismal over the last decade, recent increases bring good news for those that have room to save.  I-bonds currently offer 9.62% annualized returns through October.
 
This is what you need to know about I-bonds.
I-bonds are issued by the U.S. Treasury. The interest rate paid by I-bonds is made up of two different components; a fixed-rate which is set by the Treasury and remains the same for the life of the bond, and a variable rate that is based on the Consumer Price Index that gets updated every 6-months. Interest earned on I-Bonds is exempt from state and local income taxes. Even though they are subject to federal income tax for the bond owner, they may be completely tax exempt if used to pay for qualified higher education expenses.
 
Example reasons to buy I-bonds include:
  • Save in a low-risk product to protect against inflation
  • Supplement retirement savings
  • Give as a gift
  • Tax free if used to Pay for dependent’s education
There are some limitations to this kind of investment. They include:
  • Investors are capped at purchasing up to $10,000 worth of I-bonds per year, but you can also purchase an additional $5,000 with your tax refund to make the total annual purchase $15,000.
  • I-bonds are only available online by setting up an account through TreasuryDirect or in paper form using your federal income tax refund.
  • I-bonds don’t pay income while you own the bond, therefore they are not recommended as an investment that provides a steady income flow. Rather, the interest accrues and gets paid out when you sell or the bond matures. Interest is calculated monthly but is compounded twice per year. You can earn interest for 30 years unless you choose to cash the I-bond before that period is up.
  • Investors cannot cash in I-bonds until one year after purchase. To not lose any interest on this investment, you must hold on to the bond for a minimum of 5 years. Otherwise, you will lose the previous three months interest.
Still, if you are a conservative investor, purchasing an I-bond may be a great option. To learn more details about I-bonds and to view step-by-step purchase instructions, you can visit TreasuryDirect and see if they are a right fit for you. Although we cannot assist in purchasing I-bonds for you, we can help you find solutions to meet your financial goals and strategize ways to adjust in constantly changing markets.
 
 

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