The main benefit of I Bonds is that they protect your cash from inflation. I bonds currently earn 7.21% through April 2022.
U.S. Treasury issued Series I savings bonds are a low-risk savings product. They are a good hedge against inflation (the “I” in the name stands for “inflation”), because during their lifetime they earn interest and are protected from inflation.
Inflation can be a very destructive economic force that reduces the value and purchasing power of your money over time. With inflation at a 40-year high, many investors are looking for ways to protect the value of their cash, and Series I bonds could be a good solution.
These Series I bonds have two interest rates:
- A fixed rate that never changes for as long as you hold the bond — currently 0%
- A variable inflation adjusted rate that changes every six months based on the Consumer Price Index (CPI) — current annual rate is 7.12% through April 2022.
The Treasury will announce the new I bond annual interest rate based on CPI in May, which might be higher or lower than the current rate.
You may purchase:
- Electronic I bonds via TreasuryDirect.gov
- Paper I bonds with your IRS tax refund via IRS Form 8888
I bonds are sold at face value and earn interest from the first of the month in the issue date. Interest is earned monthly and is compounded semiannually: the interest the bond earned in the previous six months is added to the bond’s principal value; then, interest for the next six months is calculated using this adjusted principal.
Interest accrues until the bond reaches 30 years maturity or you cash the bond. You can’t access the interest payments until you cash the bond.
I bonds do not incur state or local taxes (SALT), but the bond owner will owe federal tax on the interest earnings unless the money is used for qualified education expenses.
You can’t redeem the bond for at least 12 months, and if you redeem the bond within five years, you forfeit the last three months of interest.
There are dollar limits on the quantity of Series I bonds you can purchase each calendar year:
- $10k maximum in electronic bonds per person (minimum $25)
- $5k maximum in paper bonds (minimum $50)
You can also purchase bonds for children under the age of 18 and, in some instances, for trusts and estates.
The main benefit of Series I bonds is that they protect your cash from inflation. And, Series I bonds can be a good solution if you have a savings goal over the next 2 to 5 years and want to protect the value of your savings.
References:
- https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
- https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
- https://facetwealth.com/article/series-i-bonds/