Are you looking for safe investment options to protect your cash from the unforgiving inflation rates? A recent report shows that inflation is sky-high at 8.5%, which means your purchasing power continues to nose dive. When the inflation rate increases, you’ll need as much money to buy gas, energy, food, houses, and other commodities. Furthermore, your savings and fixed-income investments can feel the heat of high inflation rates. This is why investors are looking into I Bonds which are risk-free and inflation-protected.
The current rate for I Bonds is 6.89%. This rate is good for all Series I Bonds issued between November 1, 2022, and April 30, 2023.
If you need a safe investment for your cash when the inflation rate is soaring at a terrific speed, I-Bonds are the best option. This article is a complete guide to Series I Savings Bonds, AKA, I Bonds, and how to invest in these risk-free assets.
Table of Contents
What Are I Bonds, And How Do They Work?
Inflation-protected Series I Savings Bonds are tax-deferred and risk-free assets the U.S Treasury offers. You can invest in these government-backed securities to protect your money from inflation surges. Typically, I Bonds are tied to the inflation rate, so The Fed adjusts it accordingly to give investors the best returns.
In simple terms, I Bonds deliver the highest returns on your principal amount as the inflation rises.
Unlike other investment options like savings accounts and CD (Certificate of Deposit), I Bonds are a long-term surefire way to protect your liquid assets from losing value.
How Do I Bonds Work?
Once you buy an I Bond from the TreasuryDirect site, it earns monthly interest from the issue date to maturity, which is 30 years. Does the 30-year maturity sound like a lifetime? You can cash out your I Bond any time after the first year, and there is a catch—we’ll look into this more later.
Your principal amount compounds semi-annually since I Bonds’ interest rates are revised twice yearly. In other words, the Treasury will add the total accrued interest from the issue date to the bond value to get a new principal amount.
The new principal amount will earn interest at whatever rate available for the current semi-annual.
You can purchase paper or electronic Series I Savings Bonds. The minimum amount you need to buy an electronic I Bond is $25, and you can buy these electronic bonds for any amount to the penny.
On the other hand, with paper I Bonds, the minimum purchase is $50 and are only available in face value of $50, $100, $200, $500, and $1,000.
The maximum amount of I Bonds you can buy each year is $10,000 for electronic bonds and $5,000 for the paper I Bond. You are eligible to purchase electronic and additional paper I Bonds worth $5,000 with your tax refund per year.
Married couples can be eligible to buy a maximum of $20,000 in I Bonds per year.
In a snap, Series I Savings Bonds are the ideal government security for investors looking for a long-term saving option for a large sum of money.
The U.S. Department of the Treasury announced Series I bonds will pay 6.89% annual interest through April 2023, down from the 9.62% yearly rate offered since May.
Should the inflation rate drop, you can expect the I Bonds’ interest rates to decrease.
When Do I Bonds Mature?
I bonds have a maturity period of 30 years. During this period, the bond earns interest, and the value grows due to both the interest earned and an increase in the principal value. If you hold an I bond for the full 30-year term, you will receive the accumulated interest along with the original investment amount at maturity. However, you have the option to cash in the bond before the 30-year mark. If you redeem the bond within the first 12 months, you will lose the last three months’ worth of interest. After 12 months, there is no interest penalty for cashing in the bonds.
What Is The Difference Between I Bonds And EE Bonds?
Series I and EE Savings Bonds are Treasury Securities with different perks. What sets the two bonds apart is that I Bonds offer a fixed and variable rate return to match inflation while the EE Savings Bonds offer a fixed return rate.
Additionally, the EE Bonds guarantee double value over a saving period of 20 years, while the I Bond doesn’t offer this benefit.
Another difference between I Bonds and Series EE Savings Bonds is that the latter are available electronically only, while you can buy the former in electronic or paper.
I Bonds v/s EE Bonds
Fixed and variable rate returns
Fixed rate return
Doubling of Value
Guaranteed after 20 years
Electronic and paper
Up to $10,000 (electronic), $5,000 (paper)
Up to $10,000 (electronic)
Tax-free at state and local levels
Tax-deferred at state and local levels
Are I Bonds A Good Investment?
The unforgiving, 40-year high inflation rate is giving investors sleepless nights. Locking close to 10% returns on your investment might be the best money move.
Below are the best reasons why Series I Savings Bonds are a good investment.
1. Federally-Backed Savings Bonds
One reason to add I Bonds to your portfolio is that these investments have the U.S government’s full faith. Federally-secured savings bonds are less volatile and risk-free than stocks.
2. High Returns
If you hold your I Bonds to maturity, you can be confident of reaping a predictable high yield on your principal amount. The opportunity to get high returns risk-free is too enticing to ignore.
3. Tax Benefits
Did you know that you won’t have to pay state and local taxes on I Savings Bonds? You will enjoy tax-free interest, which is a great deal if you live in one of the states with the highest income taxes.
Federally, your interest earnings accrue tax-free until maturity, and the yield at maturity is subject to federal taxes unless you use the revenues to fund higher education.
4. Cushion Against Inflation
The main goal of I Bonds is to counteract inflation impacts, and thus the “I” in Series I Savings Bonds stands for inflation. Investing in I Bonds will give you a stronger purchasing power amid the crushing economy.
Are Series I Savings Bonds Taxable?
I Bonds, like other fixed-income investments, enjoy some excellent tax benefits. First, I Bonds are tax-free at the state and local levels, which means you owe federal income tax only on the bond yield.
You owe the federal income taxes if you are the sole owner of the Bond or co-own it with someone else. If you purchase a bond under another person’s name, that individual is responsible for the tax filing on the Bond.
If you buy the I Bond and add another person as the co-owner, you’re still responsible for the tax.
There are two tax reporting options for you when you own I Bonds. You can choose to report taxes on the bond earnings every year or defer it until bond maturity or when you give up the Series I Savings Bond ownership.
The benefit of annually filing your bond taxes is that you can enjoy lower tax rates than might be in the tax maturity year.
TreasuryDirect automatically reports the electronic bond earnings to the IRS once it matures or is reissued—the interest will reflect in the 1099-INT. When you redeem your paper bond at the bank or credit union, they’ll offer you the IRS interest income form within the first two months.
Do You Want To Use I Bonds To Save Money For College Or University Expenses?
I Bonds for eligible college expenses are tax-free once they mature and you use them on education within that tax year. This tax benefit applies to spending the I Bond earnings on your education, spouse, child, or other dependents.
Factors To Consider Before Investing In I Savings Bonds
Before you commit your money into I Savings Bonds, the first thing to know is the maturity date.
Dissimilar to other short-term fixed-income investments, I Bonds are long-term. These Bonds have an initial 20-year maturity and an additional 10-year if you need to extend the maturity.
You’ll have to wait for 30 years to access your funds and enjoy the interest.
If you redeem your I Bonds before maturity, you risk forfeiting some of the interest returns.
Technically, you’ll have to hold the bonds for at least 12 months before redeeming them. And the catch here is that you will forfeit the last three months’ earnings once you liquidate the I Bond within the first five years.
You can try short or mid-term fixed-income investments if you prefer a lower bond maturity.
Another crucial factor is the I Bond purchase limits. You can also purchase up to $10,000 in electronic bonds, and if eligible, you can add $5,000 in paper bonds from your tax refund per year. This means that I bonds are excellent options for the average consumer and may not be valuable for the wealthy.
Another consideration is that you can only buy and cash I Bonds on the TreasuryDirect platform, and there are no go-betweens.
Eligibility To Buy I Bonds
Who can buy I Bonds? To purchase and own I Bonds, you must be a U.S citizen, resident, or a civilian employee of the U.S. Individuals, children, estates, trusts, cooperations, and partnerships can be eligible to own I Bonds.
Notably, your child is eligible to own Series I Savings Bonds under a custodian account.
For instance, you can open a TreasuryDirect account for your child and manage all the transactions with electronic I Bonds. You can transfer the account ownership to your child once they hit the age of the majority.
With paper I Bonds, you can buy the asset in your child’s name.
Where And How To Buy I Bonds?
You can buy I Bonds only at the TreasuryDirect, which means you need to open your TreasuryDirect account. It takes less than four minutes to create your account online. And to open a TreasuryDirect account, you’ll need your social security number, address, email address, and checking or savings account.
Once you create your account, you’ll receive a TreasuryDirect email with your new account number. You’ll need this number to log in to TreasuryDirect.
Follow the prompts to log in with a one-time OTP and start the I Bonds ownership process.
Navigate to the BuyDirect, select Series I, and fill in your registration information.
Choose the amounts of electronic I Bonds you would like to buy—between $25 to $10,000— and set the purchase date. You can automize recurring I Bonds purchases and submit them.
Please review the information carefully before finalizing your I Savings Bonds purchase online.
If you need to buy paper Series I Savings Bond, you’ll have to fill and submit IRS Form 8888 when filing your tax returns. Typically, you’re authorizing IRS to buy paper I Bonds with a part or all of your tax returns.
You don’t need the TreasuryDirect account to buy I Bonds, and you can choose between $50, $100, $200, $500, and $1,000 denominations.
For instance, if you need to spend $300, you can buy fewer possible face values in increments.
Make recurring paper I Bonds investments to a maximum of $5,000.
How Do You Calculate The Series I Bonds Interest?
You can keep track of your electronic I Bonds interest earnings online through your account. TreasuryDirect offers an online savings bond calculator to evaluate the current value of your paper I Bonds.
The I Bonds calculator can also help you estimate the interest rate, up-to-date interest earnings, next accrual, and maturity dates.
How To Use Series I Savings Bonds?
You can use I Bonds to achieve various financial goals like earning interest to boost your retirement income and funding higher education.
Additionally, you can buy I Bonds as a gift for someone you love to give on any occasion. Whether it is Christmas, Thanksgiving, or National Brother’s Day, I Bonds can make the perfect gift.
Furthermore, you can use I Bonds to get a hedge against the surging inflation.
How I Bonds Fit Into A Low-Risk Investing Strategy?
I bonds are a suitable addition to a low-risk investing strategy for investors looking to protect their savings from inflation while avoiding significant market fluctuations. Due to their low-risk nature and government backing, I bonds provide a safe haven for preserving the purchasing power of cash. They can serve as a valuable component of a diversified investment portfolio, especially for conservative investors seeking stable returns with reduced exposure to market volatility.
I Bonds: Pros And Cons
(i) Inflation Protection: I bonds safeguard against inflation, helping investors preserve the real value of their money.
(ii) Tax Advantages: The interest on I bonds is exempt from state and local taxes, and investors can choose to defer federal income tax.
(iii) Government-Backed: I bonds are backed by the U.S. government, making them a secure investment.
(iv) Low Investment Minimum: Investors can start with as little as $25 for electronic I bonds.
(i) Long Maturity Period: The 30-year maturity period may not be suitable for investors seeking liquidity.
(ii) Variable Interest Rates: While I bonds offer inflation protection, the variable interest rates can lead to uncertainty in returns.
(iii) Annual Purchase Limit: There are limits on the amount of I bonds an individual can buy in a calendar year.
Alternatives To I Bonds
Investors seeking alternatives to I bonds may consider the following options based on their risk tolerance and investment objectives:-
(1) Treasury Inflation-Protected Securities (TIPS): Similar to I bonds, TIPS are designed to protect against inflation but have different characteristics.
(2) Certificates of Deposit (CDs): CDs offer fixed interest rates and are insured by the FDIC up to a certain limit.
(3) Money Market Funds: These funds invest in short-term, low-risk securities, providing liquidity and stability.
(4) High-Quality Bond Funds: Conservative bond funds can offer steady returns with lower risk compared to equities.
(5) Municipal Bonds: Tax-exempt municipal bonds can be attractive for investors in high tax brackets, offering income without federal income tax liability.
I Bonds are a nearly risk-free and inflation-protected investment option offered by the U.S. Treasury. With the current all-time high interest rate of 9.62%, they provide a safe haven for investors seeking protection against inflation.
The tax advantages, high returns, and government-backed security make I Bonds an appealing addition to a low-risk investment strategy. However, investors should consider the long maturity period and variable interest rates as potential downsides.
Overall, I Bonds can be a valuable tool for preserving the purchasing power of cash and achieving financial goals with minimal risk.
One downside of I bonds is that they have a long maturity period of 30 years, so your funds are tied up for a significant amount of time.
Yes, I bonds can be a good investment option for those seeking a risk-free investment that provides protection against inflation.
No, you cannot lose money on an I bond as they are backed by the U.S. government and provide a guaranteed return of the principal amount.
If you want a fixed rate of return and are not concerned about inflation protection, EE Bonds can be a suitable option.
However, if you want to protect your investment from inflation and are willing to accept variable returns, I Bonds may be a better choice.