From the Archives of TGIF 2 Minutes (original post May 13, 2022) to reflect my recent purchase of I-Bonds and continued questions received:
“What are 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.)
You can skip this entire post and simply go to www.TreasuryDirect.gov and click on “How to buy Series I” under the column, “Individuals”. The website is written – literally – as if a third grader could understand it. See the * and ** footnotes below.
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, possibly save part of that dollar, then spend most of what is left over; inflation eats away at the “left over” or saved amount. Meaning less goods and services can be purchased the next month or year. The term “real return” 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 decreasing the value of workers’ savings 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% through October 2022.
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).
- Rates are reset every 6 months on May 1st and November 1st.
- Interest on I Bonds is federally taxable but not taxed at State and local levels. (So, the $962 earned this year is only about $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, when inflation was lower. 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 heated up in the past eighteen months with the spike in inflation. Their current, high interest rate 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.