For a bond that must be held for a minimum of five (5) years for full interest to be received and can only be bought in amounts of $10,000 per year, I get a lot of questions.
To put the situation in perspective, for clients and friends with high levels of income, in the hundreds of thousands and much more, and high tax rates – marginal rates of over 32% – the interest at stake with an I-Bond is currently $600 to $800 per year and that is before taxes! That level of net interest may pay a portion of one car lease payment per year or weekend gas for a boat (in 5 years). BUT nevertheless, I get questions.
The reason the numbers make increasingly less sense are at least two:
- the interest rate on I-Bonds, which for only 6 months in early 2022 hit an annual rate of 9.62%, started plummeting to 6.89% back in November of 2022. The rate is scheduled to plummet again in about 12 days on May 2nd to an estimated annual rate of 3.79%. Every 6 months the rate of interest on an I-Bond resets, so the 9.62% (before taxes) back in early 2022 was only for 6 months. The reported rate of inflation (upon which I-Bond interest is based) has dropped mildly in the past 3 months but the interest payable on an I-Bond has plummeted. (PS. Tax rates are set to increase in 3 years.)
- current rates on 3-month and 6-month US Treasuries – not 3-year but 3-month – are in most cases higher than I-Bonds at a recently quoted 5% for a 3-month US Treasury! Why tie up money for 5 years?
Emphasize that I-Bonds must be held for 5 years for the buyer to receive 100% of the interest credited to the bond. I-Bonds can only be purchased in amounts of $10,000 per buyer per year, so the credited interest remains miniscule.
I-Bonds for all practical purposes can only be purchased through an online “TreasuryDirect” account which can be cumbersome. The silver lining there is that the buyer may forget about the money for longer than 5 years (unlikely) or forget the password and then over time the $10,000 has grown to $12,000 or $13,000, before taxes.
Yes, inflation could increase – which could mean an eventual slight increase in overall interest rates. But for the time being the 5-year hold on the monies and the low absolute dollar amount of interest payments does not tip the scales enough for me to get excited about I-Bonds.