May 11, 2022

I Bonds Are Back!


U.S. inflation is now 8.3% and our president has made fighting inflation his top domestic priority. It's no surprise, then, that I bond sales are up over ten times what they were a year ago. Yes, these boring inflation adjusted savings bonds are the new rage, providing a high rate of return on a very safe investment.

I bonds are a great long-term investment for just about anyone, and always have been. Technically, they are Series I savings bonds. There are also Series EE savings bonds, the savings bonds we are more familiar with that were first available around the time of World War II.

I bonds are issued directly from the U.S. Treasury Department at no cost and no fees ever, and come with a variable rate of return based on recent inflation. Therefore, your money is protected from inflation.

This makes I bonds probably the safest way to protect your money, safer than dollars that are exposed to inflation. Although their guaranteed rates of return are low, comparable with savings accounts, they quickly adjust upward to any rising inflation, something a bank account does not do.

Because of the current rate of inflation, new I bonds are now returning over 9.6%. Compare that with 3% for a 10 year Treasury or less than 1% for a savings account, money market or CD.

I bought my first I bonds nearly twenty years ago, making random purchases over several years. I heard some boring National Public Radio guy talking about them, noting their zero expense ratio and their variable rate of return that essentially guarantees you will never lose ground with inflation.

They have worked as advertised. Since I have had them, their rate has been as low as zero (I bonds can never return less than zero) but today some are returning over 11%! During the Great Recession when some bond funds lost nearly 40% of their value, my I bonds were returning over 6%, a nice balance during an otherwise horrible bond and stock market.

I bonds were introduced in 1998 to offer any long-term investor the ability to set aside money for safety against inflation. They are not savings accounts and they are not marketable securities.

I bonds have an annual purchasing limit of $15,000, you cannot cash them in for one year and if cashed in less than five years, you forfeit 3 months of interest. You can also buy them separately for your spouse and kids, allowing more money to be invested in them.

I bonds have a variable yield based on inflation. The bond’s interest rate consists of two components. The first is a fixed rate which will remain constant over the life of the bond; the second component is a variable rate adjusted every six months from the time the bond is purchased based on the current inflation rate.

The fixed rate is determined by the Treasury Department; the variable component is based on the Consumer Price Index for urban areas (CPI-U). New rates are published each year on May 1 and November 1.

As an example, if you purchase a bond in June, the fixed portion of the rate will remain the same throughout the life of the bond, but the inflation-indexed component will be based on the rate published the prior May. In December, six months after the purchase month, the inflation component will change to the rate that was published the month prior (November). Interest accrues monthly and is compounded to the principal semiannually.

The bonds mature in twenty years but if not cashed, are automatically renewed for another ten years at the original fixed rate. The interest earned is taxed but only by the federal government, and if you prefer, you don't have to claim the interest until you cash them up to thirty years later.

I bonds can be part of a program to cover your child’s future college expenses. If you use an I bond to pay for qualified higher education expenses such as tuition, books, and room and board, you do not have to pay any taxes on the gains if your modified adjusted gross income (MAGI) is under $83,000 (2021 single) or $125,000 (2021 married).

My suggestion for long-term investors is that they use I bonds as part of a diversified portfolio. They will never have the allure of some hot stock, hedge fund or cryptocurrency, but they also will never shock you with losses. They are just a plodding way to ensure you reach your goals, minus the drama.

One idea is to buy a certain allotment each month or year and hang on to them until you can either use them for education or retirement. You can also setup an automatic payroll deduction through your employer to make regular I bond purchases throughout the year.

Here are some additional details on I bonds. Check out more information at TreasuryDirect.gov:

  • I bonds are only available from TreasuryDirect.gov or the IRS. The minimum purchase is $25 and the maximum is $10,000 a calendar year. In addition, you can purchase $50 to $5,000 of printed I bonds from the IRS using a portion of a federal income tax refund (see Form 8888).

  • You must have a Social Security number and be a U.S. citizen or resident, or a civilian employee of the U.S. government.

  • The website is dated and sometimes painful. Further, it is difficult to find the specific details of your interest gains. But it works and it's totally free. No fees—ever.

  • You can provide a beneficiary who can then retain the bonds for the full thirty years.

  • At thirty years, the bonds remain but do not earn any more interest, and you must claim all unclaimed interest earned to date to the IRS.

  • You can purchase the bonds into a trust or other entities but transferring them from an individual into a trust is more complicated.

  • During times of deflation, the negative inflation-indexed portion can drop the combined rate below the fixed portion, but the combined rate cannot go below 0% and the bond cannot lose value.

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