I Bonds: A Safe and Secure Way to Invest in Inflation

If you are looking for a safe and low-risk way to invest your money, you might want to consider Ibonds. I bonds are a type of savings bond issued by the U.S. Treasury that offer protection from inflation. In this blog post, we will explain what I bonds are, how they work, and what are their benefits and drawbacks.

What Are I Bonds?

Ibonds, or series I bonds, are savings bonds from the U.S. Treasury. This is a relatively new Treasury security that was introduced in 1998 by the U.S. government to “encourage Americans to save for the future while protecting their savings from inflation.” These bonds can be bought for as little as $25 electronically or $50 in paper form with your IRS tax refund.

How Do I Bonds Work?

I bonds earn interest monthly and compound semiannually, meaning that every six months the interest rate is applied to a new principal value that includes the interest earned in the previous six months. Thus, your bond’s value grows both because it earns interest and because the principal value gets bigger.

The interest rate on I bonds consists of two components: a fixed rate and an inflation rate. The fixed rate is determined at the time of purchase and remains the same for the life of the bond. The inflation rate is adjusted every six months based on the changes in the Consumer Price Index (CPI), which measures the average change in prices of goods and services in the U.S. economy.

The current interest rate on new series I savings bonds is 4.30%, which will apply through October 2023. This includes a fixed rate of 0.90% and an inflation rate of 3.40%. This is down from the 6.89% rate during the six months through April 2023. Rates on any older I bonds you’re holding may be lower than 4.30%.

What Are the Benefits of I Bonds?

I bonds have several advantages over other types of investments, such as:

– They are safe and guaranteed by the U.S. government. You cannot lose your principal or interest unless there is a default by the federal government, which is very unlikely.

– They protect your money from inflation. The inflation rate component ensures that your bond’s value keeps up with rising prices over time.
– They are tax-advantaged. You do not have to pay state or local income taxes on your I bond earnings. You can also defer federal income taxes until you cash in the bond or it matures, whichever comes first. If you use the money for qualified higher education expenses, you may not have to pay any federal taxes at all.

– They are flexible and liquid. You can cash in your I bond anytime after 12 months, although you will lose the last three months of interest if you do so within five years of purchase. You can also transfer or gift your I bond to someone else.

What Are the Drawbacks of I Bonds?

I bonds also have some limitations and disadvantages, such as:

– They have low returns compared to other investments. The fixed rate component is usually very low, and the inflation rate component may not reflect your personal inflation experience. For example, if you spend more on health care or education than on food or clothing, your actual cost of living may increase faster than the CPI.

– They have low liquidity compared to other savings vehicles. You cannot cash in your I bond within 12 months of purchase, and you will incur a penalty if you do so within five years. You also cannot sell or trade your I bond on the secondary market.

– They have purchase limits and fees. You can only buy up to $10,000 worth of electronic I bonds and $5,000 worth of paper I bonds per year per Social Security Number or Employer Identification Number. You may also have to pay a fee if you buy paper I bonds with your tax refund.

Is an I Bond Right for You?

I bonds are suitable for investors who want a safe and low-risk way to save money for long-term goals, such as retirement or education. They are also ideal for investors who want to hedge against inflation and diversify their portfolio.

However, if you are looking for higher returns or more liquidity, you may want to explore other options, such as stocks, mutual funds, certificates of deposit (CDs), or money market accounts.

Before you buy an I bond, you should consider your investment objectives, risk tolerance, time horizon, and tax situation. You should also compare the features and rates of different types of savings bonds, such as EE bonds or TIPS (Treasury Inflation-Protected Securities).

You can learn more about I bonds and how to buy them on the TreasuryDirect website. You can also use our Savings Bond Calculator to find out the value of your existing I bonds or how much interest they will earn in the future.