There is a lot of talk about I-Bonds in mid-2022. So, what are they and how do they work?
I am all for safe-money products and I have been asked several times about them by clients. So, I figured I would type something up about how you can benefit and what are some of the drawbacks.
Just a reminder, I am not securities licensed, so this is for informational purposes only.
Please consult your CPA or investment advisor for any further details.
I-Bonds are Federal Government issued bonds that cannot be sold in the open market. You have to go directly to the US Treasury to purchase them.
An I-Bond’s interest yield is tied directly to the official CPI (Consumer Price Index) Inflation Rate, which as you already know from putting gas in your car and buying groceries, is ridiculous right now.
How Do I-Bonds Work?
I-Bonds are 30-year Treasury Notes that cannot be redeemed for any interest or principal in the first 12 months.
After the 1st year, until the end of the 5th year, you can redeem the full-face value of the I-Bond, minus a 3-month interest rate redemption penalty.
From the 6th to the end of the 30th year, you can redeem for full-face value plus interest.
The interest rate is reset every 6 months on I-Bonds and there is a 0% guaranteed interest rate, so you cannot lose money with them.
Interest rates reset in May and October of each year, so consider purchasing them in April or September when you know what the official inflation rate will be the following month to lock in that rate for at-least 6-months.
What Are Some Benefits to I-Bonds?
Well, as I mentioned above you cannot lose money in I-Bonds, so that’s a positive. And when we are experiencing a higher-than-normal inflationary period, the returns can become very attractive.
I also believe that any “set it & forget it” type of investment is always a positive. There are no fees associated with I-Bonds, and again, your money cannot go backward with them.
What are the Downfalls to I-Bonds?
Probably the biggest downfall is you can only buy $10,000 worth per year, per Social Security Number ($20,000 total for a married couple), and up to $15,000 if you jump through some hoops (consult your CPA).
You can only buy them from the US Treasury directly, and personally, I don’t like doing business with the government (think of the efficiency of your local DMV, and then broaden that to a national scale).
As I mentioned above, they are irredeemable for the first 12 months. But if I can be totally honest with everyone reading this, if a $10,000 investment could cause you financial hardship, then you probably shouldn’t be investing in anything.
Another downfall would be an unpredictable interest rate in the future. Which honestly is not that big of a deal since you have a 0% floor and cannot lose your money, but don’t get caught in the mindset that the first 6-month yield will continue throughout the life of the bond.
How Are I-Bonds Taxed?
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. Owners can pay taxes on the interest earned annually, at maturity, or when the bond is cashed. The only state tax due would be an estate or inheritance tax.
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.
Should I Purchase I-Bonds?
Again, I cannot advise that you should, or should not, purchase an I-Bond. But in my personal opinion, if you have “dead money” just sitting in your savings account, I don’t see how could you go wrong with picking one up, as long as you are aware of the rules listed above. But always do your research and go directly to the source for the rules and regulations for the game that you are signing up to play. Which in this case, is the US Treasury.
What About the Future?
I believe, and I hope, the fanfare around I-Bonds will be short-lived. I say that because when an I-Bond is paying over 9%, our whole country is suffering. Americans are suffering at the gas pump and the grocery store. And the ones who suffer the most are the poor, and the retiree’s that are on a fixed income. Not only do they have less buying power with the money they do have, but unfortunately a lot of them have seen a hefty portion of their investments lost to this recent market downturn.
Again, I am not trying to persuade you to buy or not buy I-Bonds, but even if a couple purchased $20,000 worth and the current interest rate would be guaranteed forever, is an extra $1,800 per year going to make a significant difference in your retirement?
If you want real protection, if you want real guarantees, if you want real inflation offset, then you need to stick to the basics. We can do all these things, and do it with a lot more than $10,000, by using annuities. Annuities are the financial instruments that have stood the test of time and they are the only thing that guarantees you a lifetime income, outside of Defined Benefit pensions and Social Security.
Most people do not have the former, and the latter gets scarier every day to rely on.
I say all of that, to say this – Keep educating yourself! Don’t be distracted by flashy interest rates that are here today and gone tomorrow. Build a solid foundation with guaranteed income and you can chase all the interest rates you want with the remainder of your money that you are not dependent on to pay your living expenses.
This plan works. I have seen it work repeatedly. I have taken the time to lay out the full plan in my video series, “20% More Income in Retirement.” If you have not had a chance to watch it, then please take the time to go through the whole series and see if it makes sense for you. I’m always available to answer questions or concerns by booking a phone call. All you need to do is click the “Schedule a Meeting” button on the top right corner of this page to see my availability. And I can always be reached directly by calling 636.926.6500.
All the best,
Marty