As an investor, the rising prices in every industry may be particularly alarming. You may be looking for safer ways to invest your wealth yet still significant returns. I Bonds, also known as Series I Savings Bonds or Series I Bonds, are inflation-protected, low-risk investments. Before investing your hard-earned cash, it is crucial to understand all the ins and outs of this strategic move. Follow along below to learn:
What Are I Bonds?
A large portion of deciding if you should invest in I Bonds lies in understanding what they are and how they work. First, I Bonds are a type of federal-backed bond, meaning you are loaning money to the government. In return, they pay out a rate of return upon your investment.
The bond earns interest over time from the fixed-rate and the variable inflation rate. The fixed interest rate is straightforward: it uses the same percentage throughout the bond’s life. Conversely, the inflation rate changes twice a year. Together, in a unique formula, these two rates create a composite rate or the actual interest rate that your investment will earn.
The variable inflation rate is precisely what makes this type of bond unique. The rate adjusts itself twice yearly to offset any inflation changes and keep up with rising prices. In effect, it helps protect the value of your investment against inflation. In particular, this makes Series I Bonds attractive during periods of high inflation.
Every year, you can purchase up to $10,000 in I Bonds. You can also buy an additional $5,000 I Bonds when you receive your tax return. In total, you can purchase up to $15,000 in I Bonds annually. You will earn interest on your investment monthly, although your interest earned will only be added to your total every six months. Likewise, your interest rate will change every six months due to the variable inflation rate.
Additionally, it is helpful to know that I Bonds should be long-term investments. You cannot cash out any I Bonds before one year is complete, although you will pay penalties if you cash out before five years. If you wait five years or more to cash out your I Bonds, you will receive all the interest you earned upon them in that period.
Are Series I Bonds Good Investments?
For many investors, Series I Bonds are excellent investments. They offer many advantages over other types of investment opportunities, especially during a time of inflation. If you decide to purchase I Bonds, you may garner any of the following benefits:
- No brokerage commissions or fees upon purchase.
- Your invested wealth remains inflation-protected.
- Current I Bond holders earn higher returns because of the high inflation rate.
- I Bond returns can be higher than other low-risk investments like savings accounts.
- You cannot lose principal as the interest rate will never fall below 0%.
- Low-middle income families may qualify for tax exemption for IBond income if you use it to pay for tuition.
- I Bonds are only subject to federal income tax but are exempt from state income tax.
- You can defer reporting interest income on your taxes until you cash in on the interest or your thirty-year maturity is complete.
Are There Downsides to I Bonds?
I Bonds may not be ideal for many, especially after considering the possible risks and downsides of purchasing these types of bonds. As with any investment, these possibilities should be taken seriously before investment:
- You can only buy up to $10,000 of I Bonds annually (and an additional $5000 with tax returns).
- You can only buy Series I Bonds through the U.S. Treasury Department
- Since you do not purchase I Bonds through a bank or broker, you need to keep track of your investment on your own.
- You run the risk that the inflation rate will decline.
- You need to hold I Bonds for at least a year. You will receive no interest if you remove your I Bonds before one year, you will receive no interest.
- If you cash out IBonds before five years, you will pay three months of earned interest as a penalty.
- A full-term for I Bonds is thirty years.
What Is the Difference Between I Bonds and EE Bonds?
I Bonds and EE Bonds are low-risk savings bonds offered by the U.S. Treasury Department. Although they have similar elements, they are very different investments. It is important to know whether I Bonds or EE Bonds would benefit your investment strategy.
EE Bonds, also called Series EE Savings Bonds or Series EE Bonds, are bonds with a fixed interest rate. Like the I Bond, they earn monthly interest, adding to your principal every six months. You cannot withdraw them before one year, although you will pay a penalty before five years. Likewise, their full term is also thirty years. Exceptionally, at the twenty-year mark, the Treasury guarantees your bond value will double. If you purchase a $25 bond today, you can cash out at least $50 in twenty years.
As you may notice, EE bonds only have a fixed interest rate. Since this is the case, they may be a safer investment for many people. On the other hand, these investments are not inflation-protected. The investment may double in twenty years, but inflation may affect its value. Typically, investors choose one over the other according to the current interest rate and the forecasted inflation rate for the conceivable future.
What Is the Current Interest Rate on I Bonds?
If you are interested in I Bonds, you may be excited to learn I Bonds currently have an exceptional interest rate. Since the fixed interest rate is 0% and the inflation rate is 4.81%, the interest rate is now 9.62%. You can benefit from this rate if you purchase your Series I Bond before October 2022. Remember that the interest rate will change as the inflation rate adjusts again.
In comparison, you may wish to know the current rate on EE Bonds. Currently, EE Bonds have an interest rate of .10%. If you purchase them at this rate before October 2022, you will keep this fixed rate for the thirty-year term.