“What are I Bonds?” Thank you to a growing number of curious and smart clients, friends and colleagues for hammering this question enough over the past several months to warrant a TGIF 2 Minutes dedicated to I-Bonds. The “I” in I Bonds stands for inflation, which is why these bonds are so HOT at the moment. (Note: inflation overall is clearly not a good thing; I Bond interest rates may be one of the only things that benefit from skyrocketing inflation.)
Inflation is higher in 2022 than it has been in over 40 years – longer than lots of TGIF 2 Minutes readers may have been alive, and certainly longer than lots of readers have been working for, earning, and spending “real money”.
“Real money” is what a person really earns after inflation: workers earn a dollar, save part of that dollar, then spend part of what is left over; when inflation perks up that “left over amount” or saved amount purchases less goods and services than it did the prior month or year. The term “real return” in finance and economics is the investment return after inflation: if an investment earns 10% and inflation is 7%, then the real return is only 3%. Bottom line, today’s high rate of inflation is eating into the value of workers’ hard-earned money and investment returns.
Enter I Bonds. A few fast facts:*
- I Bonds were first issued in 1998 and are a form of US Savings Bonds.
- US Savings Bonds are NOT FDIC insured but ARE backed by the full faith and credit of the US government.
- I Bonds, specifically, are issued with an interest rate that is based on:
- a fixed rate + an (assigned) inflation rate.**
- I Bonds have a maturity of 30 years BUT can be sold as little as 12 months after purchase BUT if sold less than 5 years after purchase will forfeit 3 months of interest.
- Interest is “paid” to the purchaser when the bond is sold or redeemed; interest is earned and compounds semi-annually and is tacked on to the principal value of the bond.
- Interest is then earned on the new, higher principal value of the bond (which is pretty cool).
- Here is the hottest fact of all: today’s initial rate on new Series I Savings Bonds is 9.62%.
Here are more “small print” facts about I Bonds that are slightly more limiting:
- A maximum of $10,000 of I Bonds can be purchased per person per year ($20,000 for married couples).
- Interest on I Bonds is federally taxable but not taxed at State and local levels. (So, the $962 earned this year is only $606 to $721 after taxes for higher tax bracket people; although double or more for multi-year purchasers and married couples.)
- The earnings rates on I Bonds issued as recently as November 2020 and March 2021 were 1.68% and 3.54%, respectively. After taxes, not a lot!
- I Bonds cannot be purchased through a broker or in IRA accounts.
- I Bonds must be purchased directly from the US Treasury either online by opening an account through TreasuryDirect.gov OR by somehow buying “paper bonds” through the US Treasury (max purchase drops to $5,000).
The “I Bond phenomenon” has briskly heated up in the past nine months with the spike in inflation. Their current interest rate certainly warrants taking a look.
**the “inflation rate” used in calculating I Bonds is not the actual rate of inflation but can roughly correlate with the published rate of inflation.