Financial

What Do I Need to Know About I Bonds?

With the stock market recently finishing off a 7-week downward spiral toward a full-on bear market, investors have been scrambling and prices have been rising. You have probably heard of—if not already been feeling—the effects of inflation. Inflation increases the cost of goods and lowers the value of your assets compared to your purchasing power. When this happens, it can cause us to seek ways to preserve our wealth. With this in mind, you may have come across I bonds as a way to earn a return while hedging against inflation. We’re here to clear up some details about what a Series I bond is so you can make an informed decision about whether you should buy into this asset class.

Where does the interest rate on I bonds come from?

Series I bonds have two important interest rates to be aware of. The first is the fixed interest rate, which is a percentage rate determined by the Secretary of the Treasury that will not change in the future. The second rate is the inflation rate determined by the Consumer Price Index (CPI), calculated by the The U.S. Bureau of Labor Statistics. The CPI is a measure of the change in the cost-of-goods over a period of time and it’s released monthly. When you combine these two interest rates, you get the total interest rate that the Series I bond will return, also know as the “composite rate.” 

Once the fixed rate is determined, any bond purchased during the six months after that rate was released can expect to have that fixed-rate interest return for the life of the bond (typically 20 to 30 years), or until they sell the bond. However, the inflation rate determined by the CPI index will fluctuate regardless of when the bond was purchased.

What is the current interest rate on I bonds?

As of June 2022, the composite rate for I bonds (the fixed rate plus the inflation rate) is 9.62%. This is for the May 2022 to October 2022 period and a new rate will be released in November for the November 2022 to April 2023 period. So, if you purchase a Series I bond between May 2022 and October 2022 you can expect to earn approximately $481 on top of your $10,000 in the first 6 months. Just keep in mind that if inflation goes down, so will the interest earned on your bond when the new rate is released in November.

How can I buy I bonds?

The first thing you should know is that an I bond is not marketable, meaning it cannot be bought or sold on a secondary market. You have to buy through the TreasuryDirect website. You are capped at purchasing $10,000 annually worth of electronic I bonds and you can buy up to $5,000 more in paper I bonds with your federal tax refund.

When and how can I sell my I bonds?

A Series I bond can be sold anytime after being held for 1 year. If you sell an I bond within 5 years of holding the bond, you will lose the previous three months of interest. Electronic I bonds must be sold through TreasuryDirect. Paper I bonds can be cashed through local banks that offer the service or by sending them to the Treasury. 

What should I know about taxes on I-bonds?

If a Series I bond is sold to pay for higher education, then the interest on the bond (which is considered income) is exempt from federal income tax. However, if the Series I bond is not sold to cover the cost of higher education the holder of the bond earned income from the interest will be taxable by the federal government but exempt from being taxed by state and local governments.

You can either choose to report interest on your I bonds annually or put it off until you sell the bonds.

Final Thoughts

There are other requirements, limitations, and details that you should be aware of before purchasing a Series I bond, but all in all, it can be a worthwhile investment for savers looking to hedge against inflationary pressures. 

To discuss how I bonds fit into your financial plan, speak to one of our Trainers on Demand

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What Do I Need to Know About I Bonds? is written by Kadri Augustin, Certified Financial Trainer for financialgym.com

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