SSeries I Savings Bonds, aka I Bonds, have a little time. Long championed by financiers as one of the best ways to protect against inflation, I bonds are finally catching the attention of the general public, thanks to interest rates that now far exceed similar safe investments.
The reason why these government savings bonds to offer such good protection against inflation is by design: the I stands for inflation. As consumer prices rise, so I endorse the interest rates. And as of this week, I Bonds have been paying the second highest rate in their history: a whopping 7.12%. That’s almost 12 times the rate you could earn with the country best savings accounts at present.
The current interest rate applies to bonds issued between November 2021 and April 2022. On May 1, 2022, the US Treasury will recalculate a new inflation rate, based on the latest consumer price index.
Zvi Bodie is a long-time supporter of Bonds I. Bodie is an economist and author of several books on investing and finance. He refers to I Bonds as “America’s best-kept investment secret,” due to their relative obscurity.
“The best way to think [I bonds]”says Bodie,” is like “an inflation-protected savings account backed by the full confidence and credit of the US government.”
According to Bodie, no investment is more secure than bonds, and they should be used by “anyone with a social security number.”
Of course, no investment is completely safe, says Bodie. But he can’t imagine a scenario in which the US government wouldn’t be able to pay. Historically, the US government has never defaulted on bonds, he says. Not even during the Civil War or the American Revolution.
Cautions to be aware of before buying bonds I
Although they are a safe investment and currently earn impressive interest, savings bonds may not make sense for all types of savings.
Perhaps the biggest downside to I-bonds is that they usually can’t be cashed for a year, like certificates of deposit (CDs). That means they’re not the best place to store savings that you might need immediate access to, although the Treasury may make exceptions to this one-year withdrawal rule based on financial hardship, says Bodie. You will need to contact the Treasury directly to explain your situation.
(By the way, current interest rates on CDs are not comparable to those on Bonds I. Even the best 12 month CD rates are currently below 1% APY – a far cry from the 7.12% annualized rate of I Bonds. And CDs typically have minimum deposit requirements of hundreds or even thousands of dollars.)
Likewise, bonds redeemed within five years of their date of purchase have a slight drawback: you will forfeit the last three months of interest. For example, if you withdraw an I bond 20 months after buying it, you will receive the full purchase price plus 17 months of interest. After five years, you can cash them in at any time or let them mature for 30 years, the maximum interest accrual period of an I bond.
Another caveat is the annual purchase limit of $ 15,000, although this helps limit the benefits of Bonds I to low and middle income earners.
“The people who benefit from it are disproportionately middle class,” says Bodie. “It’s one of the few government programs that doesn’t favor the rich. “
It’s also worth noting how interest works for I bonds before buying one. There are two different rates, and the interest on your bond is a combination of these two rates. One is called a “fixed rate”. This interest rate does not change during the life of your bond. The Treasury sets new fixed rates in May and November, but those fixed rates apply only to new bonds purchased during that period. The fixed rate has been zero since May 2020.
The other rate, the aforementioned inflation rate, changes over the life of your bond, with new rates set every six months. Right now, the annualized interest rate is 7.12%, and you can lock in that rate for six months as long as you buy an I bond anytime before May 2022.
People who bought back I bonds when the fixed rate was above zero particularly benefit from the new inflation rate of 7.12%. For example, on May 1, 2000, the Treasury fixed the fixed rate at 3.6%. People who still hold these bonds now receive an interest rate of 10.85% on them.
Finally, keep in mind that Series I bonds work differently from other types of government savings bonds. These links, series EE bonds, have a separate interest rate and will double in face value if you hold it for 20 years, according to the Treasury. The two types of savings bonds are different from general bonds. mutual fund you might own.
Other advantages of bonds I
Besides being one of the safest investments, consider these additional unique advantages:
- No state or local taxes: I bonds are not taxable at state or local level. When you cash them in, you’ll only pay federal taxes on the interest you’ve earned. Instead, you can choose to pay federal taxes on an annual basis.
- Exemption from federal tax for education purposes: In addition to exemption from state and local taxes on interest from I Bonds, people who use the funds from Bonds I to pay for their higher education may also be exempt from taxes federal, provided they earn less than the income limits set by the IRS each year, currently $ 97,350 for single filers.
- The value cannot deteriorate: the interest rate of bonds I can never go below zero. Because of the way inflation rates are factored in, the actual value of your I Bond will never fall below what you paid for it. No savings account or share can guarantee this.
How to buy bonds I
Electronic Bonds I are available for immediate purchase via Direct cash, a government website. You will need to open an account and register the I Bonds, which determines who owns them and can cash them. Electronic Bonds I are available in all denominations, and you can purchase a total of $ 10,000 of electronic bonds per year.
Paper I bonds work a little differently. These can only be purchased with your federal income tax refund, says the Treasury. Paper bonds have an annual limit of $ 5,000 per year and can only be purchased in the following five denominations: $ 50, $ 100, $ 200, $ 500 and $ 1,000.
The Treasury reports that these buying limits are separate, which means you can buy a total of $ 15,000 per year.
To capitalize on the exorbitant interest rate, the bonds must be purchased by the end of April 2022.
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