I Bonds Demystified

Picture of Luke Barbalich, MBA

Luke Barbalich, MBA

Wealth Advisor

The topic and investment option of Series I Savings Bonds (I Bonds) has garnered more attention in recent months as equity markets continue to decline from the all-time highs notched at the end of 2021, and heading into 2022. Surging inflation has been a counter punch to most any returns on fixed income investments, often resulting in negative real returns. For this reason, investors hoping to keep pace with inflation may find the current yield of 9.62% on I Bonds to be appealing. Understanding the facts around these inflation-adjusted savings bonds and your own financial circumstances can bring clarity to whether such an investment makes sense.

I Bonds are savings bonds that were introduced by the United States Treasury in 1998 to encourage people to save money, while being protected from inflation in the process. The bond’s yield, or composite rate, is derived from a combination of the fixed rate set by the US Treasury, which is currently at 0%, and the inflation rate, which is now 9.62% for purchases made by October 31, 2022. The composite rate of the I Bond will adjust every six months, on May 1st and November 1st, depending upon changes in these rates. Interest is paid semi-annually and compounds on that same time frame. These 30-year bonds can be cashed out after being held for at least one year, and cashing out before five years will result in the loss of 3 months interest. The I Bonds can only be purchased by the investor through www.treasurydirect.gov. The process is fairly simple to complete.

Some of the facts related to investing in I Bonds may be deemed pros or cons, depending on your financial status and circumstances at the time of consideration.

Some advantages to investing in I Bonds:

  • They are relatively easy to purchase independently.
  • They are issued in small denominations and do not require a large initial investment.
  • They can be given as gifts.
  • You will never have a negative return on this investment since the composite rate will not fall below zero.
  • The face value of the bond does not change, only the interest rate.
  • Federal taxes on interest can be deferred until the bond is redeemed. They are exempt from state or local taxes.
  • I Bonds held for at least five years will not be assessed a redemption penalty.

Some disadvantages of investing in I Bonds:

  • The maximum annual purchase amount is $10,000 per person electronically, plus an additional $5,000 via paper bond using your tax return refund.
  • They must be held for at least one year before being cashed out. There are no exceptions to this rule.
  • If cashed out any time between one and five years, the investor will be penalized the last three months of interest prior to redemption.
  • I Bonds cannot be held in a Traditional or Roth IRA.

 

Series I Savings Bond Earnings Rate Since November 1998

An investor with substantial wealth may not consider I Bonds as a stand-alone investment due to the limitations on the purchase amount. In addition, anyone with short-term liquidity needs may not consider I Bonds an investment option since their money would be inaccessible for one year. While the allure of a high interest rate I Bond may be strong, we do have to remember that these rates will not last forever. The yield on the I Bond, and the rate of inflation are positively correlated, so when inflation moderates and comes down, the composite rate of the I Bond will as well. This is something to consider when evaluating the longer-term return on an I Bond. The I Bond’s yield is relative primarily to inflation, so achieving yields that exceed it are not likely, particularly when the fixed rate is currently at zero. From both a short and long-term perspective, there may be times when pairing your returns with the rate of inflation is an option worth considering. However, I Bonds may not have the same appeal to investors seeking to achieve returns that exceed the rate of inflation over a longer term.

At Biondo Investment Advisors, we welcome the opportunity to discuss your personal and financial goals to determine investments that are most suitable for you. Your inquiries and feedback are a valued part of that process. We look forward to engaging in these conversations with our clients, and their friends, family, and colleagues as well. They may reach out to me, or any member of our investment advisory team, to learn more.

 

Luke Barbalich, MBA
Wealth Advisor
Sources: Treasury Direct, Kitces, Money for the Rest of Us