Inflation is something every investor is thinking about these days, which has put some renewed attention on I Bonds. These low-risk bonds are backed by the US government and are designed to safeguard investors against inflation. Here is some helpful info about how these bonds work, as well as several pros and cons to consider.
How Do Series I Savings Bonds Work?
Series I Savings Bonds, commonly called I Bonds, are a type of U.S. savings bond designed to protect your investment from inflation. These bonds earn interest through a combination of a fixed rate and an inflation rate, which is adjusted twice a year based on changes in the Consumer Price Index (CPI).
When you buy a Series I Bond, the fixed rate remains the same for the life of the bond, while the inflation rate changes every six months. This unique structure ensures that the bond’s return keeps up with inflation, providing a hedge against the decreasing purchasing power of money.
You can purchase I Bonds directly from the U.S. Treasury’s website, TreasuryDirect, with a maximum annual limit of $10,000 per individual. The interest earned is compounded semiannually, and the bonds can be held for up to 30 years, making them a long-term, low-risk investment option.
How Long Do You Have To Keep Money In An I Bond?
Series I Savings Bonds must be held for at least one year before they can be redeemed, which means you cannot access your money within the first 12 months of purchase. If you redeem the bond within the first five years, you will forfeit the last three months of interest as a penalty. For example, if you cash in the bond after 20 months, you will only receive 17 months’ worth of interest.
After five years, you can redeem the bond without any penalties, making it a more flexible investment after this initial period. These bonds earn interest for up to 30 years, after which they reach maturity and no longer accrue interest. Therefore, while the minimum holding period is one year, the optimal holding period is at least five years to avoid penalties, with the potential for a three-decade-long investment horizon.
Can You Ever Lose Money On An I Bond?
I Bonds are designed to be a secure investment, and it is highly unlikely that you will ever lose money on them. The bonds are backed by the full faith and credit of the U.S. government, making them one of the safest investment options available.
The unique structure of I Bonds ensures that their value will never decrease; even during periods of deflation when the inflation rate is negative, the combined rate of return can never fall below zero. This guarantees that the principal amount you invest will always remain intact.
However, while you cannot lose your initial investment, the purchasing power of your money may not grow significantly if the inflation rate is low. Additionally, if you need to redeem the bond within the first five years, the three-month interest penalty might reduce your overall return, though it does not affect the principal amount invested.
Do You Pay Taxes On I Bonds?
Interest earned on Series I Savings Bonds is subject to federal income tax but is exempt from state and local taxes. You can choose to defer paying federal taxes on the interest until the bond is cashed in, matures, or is transferred to another owner, whichever comes first. This tax-deferral feature can be advantageous for investors looking to manage their taxable income strategically.
Additionally, if the bonds are used to pay for qualified higher education expenses, the interest may be entirely tax-free, provided certain conditions are met. To qualify for this tax benefit, the bond must be registered in the name of the taxpayer, spouse, or dependent and must be used for tuition and fees at an eligible institution. The education tax exclusion is subject to income limits, so it is important to verify eligibility.
What Is The Current Rate For I Bonds?
As of the most recent adjustment in May 2024, the composite rate for Series I Savings Bonds is 4.28%. This rate is a combination of a fixed rate of 1.30% and an inflation rate of 2.98%, reflecting changes in the Consumer Price Index (CPI).
- The inflation rate is recalculated every six months, in May and November, based on the latest inflation data. This structure ensures that the interest earned on I Bonds keeps up with inflation, protecting the purchasing power of your investment.
- The fixed rate, once set at the time of purchase, remains constant for the life of the bond, while the inflation rate can vary with each adjustment period.
To stay updated on the current rates and any changes, you can visit the TreasuryDirect website, which provides detailed information and the latest announcements regarding I Bonds.
Have questions about I bonds and whether they are right for your portfolio? Contact Zynergy Retirement Planning today.