First issued in 1998, Series I Savings Bonds, also known as I bonds, were specifically designed to be a hedge against inflation. With inflation at a 40-year high, it’s no surprise that we are getting an increase in questions concerning these special bonds. Currently, the I bond carries an annualized interest rate of 9.62%, which is 4.81% earned over 6 months, the highest since its inception. According to Bankrate’s May 11, 2022 weekly survey of institutions, the national average interest rate for savings accounts is 0.06%.¹ Quite a difference! So, what exactly is an I bond, what are its pros and cons, and is it a good way to protect your assets from today’s rising prices?
A Series I Bond is a bond issued by the U.S. federal government that earns interest two ways: a fixed rate, which remains the same rate you bought it at throughout its 30-year lifespan, and a variable rate, which is based on the Consumer Price Index (CPI) and is adjusted every six months in May and November. The two rates are combined to form a composite rate, also known as the earnings rate. As of May 1, 2022, the annualized variable rate was set at 9.62% and the current fixed rate is at 0%. Keep in mind though that the 9.62% rate is an annualized return, which means from May 1 to November 1 the actual return will be 4.81%. To see past and current rates; fixed rates, inflation rates, and composite rates, click here.
Series I Savings Bonds can not be purchased through the broker dealer, FSC. The only way to purchase an electronic I bond is through TreasuryDirect.gov, the online platform through which investors can purchase federal government securities directly from the U.S. Treasury. You must first set up an account on the site and then purchase the bonds directly (there are no fees to purchase I bonds). In any calendar year an investor can purchase up to $10,000 in electronic I bonds. The purchase limits are per individual so a married couple can purchase $20,000 annually using two separate accounts. You may also buy additional I bonds for businesses, trusts or estates. For example, a married couple with a business may purchase $10,000 for the company, plus $10,000 each as individuals, totaling $30,000. Up to an additional $5,000 in paper I bonds can be purchased with your federal tax refund. Electronic bonds start at a minimum of $25, and over $25, you can buy in increments of 1-cent. For example, you could purchase a bond for $83.26. Paper bonds are sold in increments of $50, $100, $200, $500 and $1,000.
An I bond is issued for a term of 30 years but can be redeemed early after holding it for one year. But, if you redeem it before 5 years, you will lose the last three months of interest as a penalty. Electronic I bonds can be redeemed through TreasuryDirect.gov at a minimum of $25 or any amount above that in 1-cent increments. Paper I bonds can be redeemed at banks and credit unions (varying policies apply). There is no tax bill while your money stays invested, but you will owe federal income tax on the interest you earned when redeemed.
Since you can’t touch the money for the first year and due to penalties on withdrawals made between years 2 and 5, I bonds may not be a good investment for your emergency savings account where you need instant penalty-free access to your money. Other disadvantages include relatively low annual purchase limits and the bonds have to be held in a taxable account, not traditional or Roth IRA.
But even with these limitations, the Series I Bond is an attractive way to earn a high interest rate on an incredibly safe investment backed by the U.S. government. As inflation remains high and continues to eat into our budgets, the advantages of investing some cash into these bonds, compared to other low-risk accounts, may be compelling. Other than the current 9.62% annualized interest rate, I bonds are virtually risk-free, simple to understand and purchase, issued in small denominations (making them easy to give as gifts), and the composite interest rate will never be negative. With the inflation rate exceptionally high right now, and with I bonds offering an attractive return in the foreseeable future, diverting some cash you won't need immediate access to into an I bond may be one solution to protecting your savings from inflation.
If you have questions, please call our office and speak with your advisor. We’re here to serve you in both times of peace and prosperity and times like the present. Thank you for your confidence and your continued commitment to Ciccarelli Advisory Services, Inc.
¹ https://www.bankrate.com/banking/savings/average-savings-interest-rates/#:~:text=National%20average%20savings%20account%20interest,ll%20earn%20on%20your%20savings.