What Are I Bonds?
An I bond, also known as a series I bond, is a U.S. government savings bond that earns interest based on a fixed interest rate and a variable inflation rate. The fixed rate remains the same for the life of the bond, while the inflation rate is set every six months. As of November 2022, I bonds offer a 6.89% rate of return. In May 2023, the Bureau of the Fiscal Service will announce a new I bond return rate.
The Department of Treasury introduced I bonds in 1998 to help Americans protect their savings during periods of high inflation. I bonds have a lifetime of 30 years. However, they are treasury marketable securities, which means you can sell them before they reach maturity.
Financial educator Kevin Brogley, explains, “A basic bank savings account isn’t really all that safe in an inflationary period. . . The interest rate you’re paid by the bank on your money is still very low, in fact, well below the rate of inflation.”
In 2022, the U.S. is experiencing the highest inflation rates Americans have seen in 40 years. With inflation reaching up to 9.1%, it’s essential to find ways to protect your money from losing its value. In this article, learn how I bonds can keep your savings safe, particularly amidst rising inflation and interest rates.
- A series I bond is a type of savings bond that protects bondholders from inflation.
- In 2022, the inflation rate reached 9.1%, the highest level the U.S. has seen in 40 years.
- The I bond composite rate is determined by a combination of a fixed rate and an inflation rate.
- As of November 2022, the composite rate is 6.89%, which reflects a 0.4% fixed rate and a 3.24% inflation rate.
- Electronic I bonds have a $10,000 annual limit, while paper bonds have a $5,000 annual limit.
How Do I Bonds Work?
How much money can be held in I bonds?
I bonds can be purchased in any increment ranging from $25 up to the maximum annual limit. You’ll be able to buy a maximum of $10,000 in electronic I bonds per year and $5,000 in paper bonds. If the annual limit of $10,000–$15,000 is not enough to cover your entire savings fund, you’ll want to find other reliable investments where you can hold your savings.
How is the series I bond interest rate determined?
The I bond interest rate is a combination of a fixed rate and an inflation rate. Together, the fixed rate and the inflation rate make up the composite rate. Here’s how to calculate the composite rate:
Fixed rate + (2 x annual inflation rate) + (fixed rate x semi-annual inflation rate) = composite rate
As of November 2022, the fixed rate is 0.4%, and the inflation rate is 3.24%, so the composite rate calculation looks like this:
0.004 + (2 x 0.0324) + (0.004 x 0.0324) = 0.0689296 or 6.89%
Individuals who purchase an I bond any time between November 2022 and April 2023, will receive that 0.4% fixed rate for the life of the bond. However, when the new inflation rate is announced in May 2023, the composite rate formula will be updated to reflect the change.
Although the updated inflation rate is announced every May and November, your bond’s composite rate does not change automatically in May and November. Instead, you keep earning interest based on the original composite rate for the first six months of owning the bond. Six months after the purchase date, the composite rate updates to reflect the current inflation rate.
Are I bonds a good investment?
Finance educator and investor Steven Kays gives his opinion about series I bonds. He says, “Since inflation has historically averaged something like 3% per year, honestly, I bonds haven’t been all that exciting in the past . . . But occasionally inflation goes crazy, and I bonds become temporarily a really good deal.”
Recently, the U.S. has been experiencing an inflationary period where I bonds are one of the best high-yield, low-risk investments available. While inflation may be past its peak, many experts believe it will remain elevated for a while, meaning I bonds will keep their high-interest rates.
Chief Investment Officer at Carbon Collective Zach Stein spoke with Time about whether or not inflation will return to normal rates soon. “Even with the likelihood that inflation has peaked, inflation will still remain elevated for some time, as supply chain issues persist and there is still plenty of instability with the Ukraine war, which has caused significant swings in energy prices,” he says.
Here’s what your investment might look like if you invested in a Series I bond in early 2022:
If you purchased a $10,000 I bond in April 2022, that bond would earn interest at a rate of 7.12% based on a 0% fixed rate and a 3.56% inflation rate. You would earn 7.12% until October 2022 when the composite rate would update to reflect the new inflation rate.
Because the bond was purchased with a fixed rate of 0%, the composite formula will reflect that rate until the bond is redeemed or reaches maturity in 2052.
Here’s what your bond’s earnings would look like 18 months after your purchase:
April 2022–October 2022: 7.12% (composite rate calculated with a 0% fixed rate and 3.56% inflation rate)
November 2022–April 2023: 9.62% (composite rate calculated with a 0% fixed rate and a 4.81% inflation rate)
May 2023–October 2023: 6.48% (composite rate calculated with a 0.4% fixed rate and a 3.24% inflation rate)
Based on these interest rates, a $10,000 bond purchased in April 2022 would be worth $11,208 in October 2023.
How liquid are I bonds?
I bonds are best for individuals who will not need to access their funds for the next 1–5 years. You will not be able to withdraw your funds during the first year following your purchase. If you withdraw funds after the first year but before the fifth year of ownership, you’ll have to sacrifice the last three months of interest.
I bonds mature after 30 years, meaning you won’t be able to hold the bond for longer than 30 years. If you choose not to redeem the bond early, you’ll receive the principle and the interest earned when the bond reaches maturity.
Top Benefits of I Bonds
1. Inflation Protection
With inflation rates still above 8% in late 2022, inflation protection is top-of-mind for investors. During inflationary periods, it’s essential not to let your savings sit stagnant in a bank.
Finance expert and author Farnoosh Torabi says, “If your money was just sitting in a standard savings account earning zero percent, your savings would actually be losing value. For example, saving a dollar this time last year would actually be worth 91 cents today, given the current rate of inflation.”
While investors may hope to beat inflation by investing in stocks or index funds, the return rates are unpredictable and may drop during economic slowdowns. However, I bonds set return rates in direct response to inflation rates in the U.S., guaranteeing positive returns as long as inflation rates are high.
2. Guaranteed Return
Most investments involve some amount of risk. When you buy stocks, index funds, or real estate, you risk losses if the value of your investment drops. But you cannot lose money by purchasing an I bond. While the interest rate goes up during periods of high inflation, the United States government has guaranteed I bond owners that the rate will never drop below zero, even in deflationary periods.
Additionally, the fixed interest rate of an I bond will remain the same throughout the life of the bond. While in recent years the fixed rate has been zero percent, as of November 2022, the rate rose to 0.4%. While this rate isn’t particularly high, it is a guarantee that regardless of the performance of the economy, your investment will grow in value.
With the guarantee of the U.S. government, you can be confident you’ll be able to retrieve your money when it’s time to redeem your I bonds. The U.S. government has never defaulted on its debt, making it one of the safest places a person can put their money.
3. Tax Benefits
The income you earn from most types of investing is subject to federal, state, and local taxes. However, I bonds are exempt from state and local taxes. In areas with high state income taxes, you can reduce your tax bill significantly by investing in I bonds instead of stocks.
In some cases, you may be able to avoid paying federal taxes on your I bonds’ interest. Using I bonds to pay for higher education expenses for yourself, a spouse, or a dependent may allow you to skip the federal tax on the money you earned.
How to Buy I Bonds
If you’re ready to buy an I bond, you have the option to do a one-time purchase of an electronic I bond, a recurring purchase through a direct deposit of your paycheck, or a paper purchase using your tax refund. Here’s what you need to do for each option:
Buy Electronic I Bonds Through a Treasury Direct Account
- You’ll first need to set up a Treasury Direct account. This process includes filling out some personal information and should only take about 10 minutes. You can open an account here.
- Select “BuyDirect.”
- Select “Series I” from the category “Savings Bonds” and click “Submit.”
- Fill out your desired purchase amount and other requested information.
Set Up a Payroll Savings Plan to Contribute a Portion of Each Paycheck to I Bond Savings
- The Payroll Savings Plan also requires a Treasury Direct account. If you haven’t already created an account, you’ll need to.
- Select “ManageDirect.”
- Select “Establish My Payroll Savings Plan.”
- Fill out your desired recurring contribution amount and other requested information.
- Contact your employer to set up recurring deposits from your paycheck. They’ll need to know TreasuryDirect’s routing number, your account number, and the amount you’d like to deposit each pay period.
Use Your Tax Refund to Buy Paper Bonds
The only way to purchase paper I bonds is through your tax returns. While filing your taxes, you’ll need to fill out Form 8888 to specify how much of your tax return you want in the form of an I bond and how much you want in cash. You can purchase up to $5,000 in paper I bonds per year.
Other Low-Risk Investment Strategies
With an annual limit of $15,000, you may need other savings and investments to protect your money from inflation and grow your wealth. While investing in the stock market, real estate, and other high-risk, high-return options can be lucrative, if you’re looking for reliable, low-risk investments, look to these I bond alternatives:
- EE bonds: EE bonds are another type of government savings bond. When inflation is low, an EE bond will likely offer a higher yield than a series I bond. The current EE bond interest rate is 2.1%, but if you are willing to hold the bond for 20 years, the treasury guarantees your bond will double in value.
- Corporate bonds: A corporate bond is a type of debt security issued by private companies. In 2022, the average 10-year high-quality bond interest rate was 4.57%. Corporate bonds often do not have annual maximums and offer higher yields than traditional savings accounts or EE bonds. However, corporate bonds come with higher risk than government bonds because the company could potentially default on the bond and be unable to pay you.
- Fixed annuities: An annuity is a contract with an insurance company. In exchange for an upfront payment, owners of fixed annuities are guaranteed a certain amount of income for a fixed period of time or until death. Annuities are an excellent choice for individuals nearing retirement, but it’s important to choose an annuity without high fees. Average annuity fixed rates in 2022 are between 3.6% and 5.25% ranging from two years to ten years in length.
- Treasury Bills: A treasury bill is a U.S. government debt security with a maturity length of one year or less. As of November 2022, the rate of return on a four-week treasury bill was 3.53%. These are good investments for individuals looking for high liquidity and quick returns.
To learn more about growing your wealth through safe investment strategies, check out these articles:
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