Investors flock to I bonds. So, what are they?
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There’s been quite a bit of buzz about Series I bonds lately so we wanted to take a moment to discuss the basics of the I bond.
I bonds are a type of U.S. savings bond designed to protect the value of your cash from inflation. With inflation rates hitting highs not seen since 2007, investors are becoming more interested in higher-returning, lower-risk investments, and this variety of savings bond fits the bill.
I bonds are safe investments issued by the U.S. Treasury to protect your money from losing value due to inflation. Interest rates on I bonds are adjusted twice a year to keep pace with rising prices. In addition, series I bonds are exempt from state and local income taxes, which makes them an even better low-risk investment for investors who live in high-tax states and cities.
Investors can buy up to $10,000 worth of I bonds annually through the government’s TreasuryDirect website. You can purchase another $5,000 with your tax refund, upping the annual total purchase amount of series I bonds to $15,000 per person.
I bonds earn interest monthly, though you don’t get access to the interest payments until you cash out the bond. Interest you earn is added to the value of the bond twice per year, compounding your money over time.
When Do I Bonds Mature?
I bonds have a maturity of 30 years. They carry a 20-year original maturity period immediately followed by a 10-year extended maturity period. There are several ownership caveats with series I bonds:
I bonds cannot be cashed for one year after purchase.
If a bond is cashed in year two through five after purchase, the prior three months of interest are forfeited.
There is no interest penalty for cashing in the bonds after five years.
How Are I Bonds Taxed?
As mentioned before, I bonds are exempt from state and municipal, but not federal, income taxes. If they’re used to pay for qualified higher education expenses, however, I bonds may be completely tax-exempt. The owner of the bond is liable for the tax payments, regardless of who purchased the bond. So if you received an I bond as a gift, you are responsible for the tax payments.
Investors should consider that the profit made from interest is completely dependent on the financial climate in the future. The higher inflation rises, the better the profit in regards to I bonds. Given lower trending inflation rates over the last couple of decades it would take longer to double your money. However, should inflation increase substantially, then I bonds holders would win out. Unfortunately, the only way to tell which bond earns more over time is in hindsight.
If you have any questions about which saving tools work best for you, please feel free to give us a call or book a time directly on our calendars to meet in person or via Zoom, whichever you prefer.
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