You hear it all over the news: get 9.6% risk‐free interest by buying I‐Bonds. Clients ask us whether they should invest in them. Let’s look a bit closer at what an I‐Bond is and the pros and cons of buying them now.
Here is a summary:
An I Bond is a US Savings bond that earns interest based on combining a fixed rate and an inflation rate. (This is different from a (TIP) Treasury Inflation‐Protected Security.) The fixed rate stays the same for the life of the bond (currently 0%) and a variable rate tied to inflation (till October 2022 9.62%). If you buy it any time before October, you will receive 6 months of interest at that rate. After that the interest rates will be reset, which may be higher or lower. The interest will accrue in the bond and you will receive it when you redeem (sell) the bond.
You can only buy the bonds as an individual investor at www.treasurydirect.gov; you can find all in‐depth details on that website. The I Bond can be bought electronically in any amount, from $25 and the limit is $10,000 per year. There is also a paper version, that can only be bought when filing a federal income tax return.
Pros
- It is a high interest rate and there is no risk to principal.
- Tax Benefits – the interest is subject to federal income tax, but not to state or local income tax. When used for paying for higher education the interest might be tax‐free.
- The interest accumulates in the bond and is available when you redeem it. This can accumulate nicely if you keep them longer.
Cons
- There is a limit on the purchases of $10,000 per person per year.
- The high variable interest rate will not last, as the Fed is set to curb inflation. The fixed and variable interest rates will change 6 months after you buy.
- They don’t provide a cash stream and cannot be used as emergency fund. You can hold them for 30 years (maximum time) or sell them after one year (minimum hold time). If you sell them before five years, you will lose the previous three months of interest.
- It is a hassle to buy the bonds. You have to set up an account at Treasury Direct and create a link to your checking account. Once this is set up, it’s easy.
- Your advisor cannot buy them for you and you might forget about them. Inform your advisor and update the value every year in your financial plan.
- All in all, the high interest rate and the tax benefits might be worth going through the effort, especially if you maxed out all tax‐deferred savings accounts. You can use them as savings for college, or for a long‐term investment for retirement years.
Before you buy them, think about how they fit in your financial planning. If you find it difficult to navigate the Treasury Direct website, contact us and we can help you.
Anja & Clare
