Why Consider Investing In I Bonds Now

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Although the annual inflation rate dipped slightly in April compared to the more than four decade high of March, the 8.3% CPI still exceeded market predictions. Furthermore, this fact confirms inflation isn’t slowing to the degree forecasted. As a result, financial-savvy Americans, myself included, continue to look for ways to protect their investments from inflation. Series I bonds are an avenue worth consideration.

I-bonds provide an inflation-protected interest rate with the security of government backing. Let’s talk more about I Bonds basics, how these investments function, important facts to know, and why they are worth considering for your investment portfolio.

What is an I Bond?

First, at the mention of the term bond, people often think of traditional savings bonds. Once a popular gift idea for millennials, givers bought Series EE savings bonds at face value with the guarantee to double over the next 20 years. However, a Series I bond is not the same type of savings bond.

Series I Bonds earn interest in two ways but unlike a Series EE they do not guarantee reaching a specific amount. Since a specific amount or return rate isn’t guaranteed, you may wonder if the value of the bonds could ever be less than you pay.

Importantly, the interest rate cannot drop below zero and the redemption value will not drop below what you paid. Thus, you will not lose money or encounter a negative rate of return. However, opportunity costs still exist. You may miss out on a better rate of return not investing in another vehicle that produced a higher yield. Essentially missing out on making more not necessarily losing anything.

Now back to the ways I bonds earn interest. Specifically, I bonds work by earning fixed and variable interest rates. Variable interest rates adjust with inflation biannually to protect purchasing power from changes in rising rates.

Furthermore, I Bonds earn interest monthly that is then compounded semiannually. This means two times a year, the interest from the prior six months is added to the principal of the bond. Then interest accrues over the next six months on the adjusted amount. However, interest and principal pay only when you cash the bond.

Important Things To Know Before You Purchase

To start, you need to qualify and have a TreasuryDirect account to buy I bonds. Let’s also discuss a few other important items to bear in mind before deciding if to include I bonds in your investment portfolio.

Purchase Limitations

First, there are two options for purchasing I bonds. One is electronically from TreasuryDirect, and the other a paper type bought only via your federal income tax return.

Next, a fact to highlight is that individual maximums apply per calendar year. Online purchases cap at $10,000 annually per individual. The max of paper I bonds acquired through your tax return is $5,000 per year per individual. If you use both purchase options, then the individual maximum is $15,000.

On the other end of the spectrum, the minimum purchase for an electronic I bond is a low as $25. From the minimum investment, the bond can be any amount down to the penny. Conversely, paper I bonds offer much less flexibility with five specific increments available: $50, $100, $200, $500, and $1000.

Essentially, these savings bonds are mini loans to the federal government. In the current inflationary environment, the government is paying historic interest rates for I bonds. Being government-backed provides a higher level of safety than other investment vehicles.

But as a result of this assurance, the government places limitations on these bonds to limit an individual’s ability to take advantage of these opportunities with relatively small amounts of money. These caps also ration the amount of interest the government commits to paying.

Additional Purchase Options and Gifting

So, what about those with additional means to invest beyond the annual purchase limits? Are there other options for I bond purchases?

Firstly, the annual maximums apply to individuals, think unique social security numbers. Therefore, purchasing the annual maximums for your spouse and kids is a possibility. The total for a family of three is then $30,000 electronically.

Furthermore, I bonds are giftable. Any bonds you buy for yourself, and gifts delivered to you in the same year count toward your annual limit. Yet, gifts count toward the annual limits in the year the gift is delivered, not purchased. Interestingly, Finance Buff Harry Sit shared a model to further maximize individual I bond investment opportunities through gifting.

Redemption Timeframes

Redemption of I bonds cannot occur within the first twelve months after purchase. So, the invested amount stays locked up for one year before it is eligible to cash in. If held for less than five years, then you pay a penalty forfeiting the prior three months of interest.

Like Series EE, I bonds earn interest for up to 30 years.

Another note to mention is about taxation. While I bonds are taxable as federal income, they are exempt from state and local income tax.

Why Consider I Bonds Now?

With prices continuing to soar, savers and investors seek opportunities to hedge against inflation. The record high interest rates of I bonds and promotion from personal finance blogs make them a growing choice in popularity. This reason is because I bonds afford a means of protecting at least a portion of your financial resources from the soaring prices.

For any I bond purchased this month (May) through October 2022 you lock in the 9.62% annual rate for six months. Even if in the subsequent six months the interest rate plummets to zero (which is incredibly unlikely), the return still earns more than other safe mediums. Comparatively, a high yield savings account boasts a mere half percent right now. Furthermore, being government backed provides more security than risking it in the stock market.

Therefore, this logic makes I bonds worth the consideration.

Thinking of buying I bonds? Here is a great guide for getting started. Looking for ways to save money? Check out 6 Simple Hacks!

*This is an opinionated article and does not constitute legal financial advice. Any individuals should speak with their fiduciary and/or licensed financial professional before making any investment decisions.