With the stock market still shaky and inflation remaining higher than years past, I-Bonds (sometimes seen as iBonds or I bonds) from the United States Treasury have become a popular investment option because their interest rate rises when the inflation rate rises. But who are they best for, exactly, and how do they work?
For answers, we checked in with David Weinstock, a principal at Mazars Wealth Advisors, to learn about the pros and cons of I-Bonds, and whether or not they might be the right vehicle for you and your financial needs.
What Are I-Bonds?
“I-Bonds are technically series-I savings bonds issued by the U.S. Treasury,” Weinstock says. “Their feature is that they are tied to inflation and that’s why they’re so popular now. Their interest rates are adjusted for inflation every six months — in May and November.”
When you buy an I-Bond, the bond has an interest rate that is a composite of a fixed rate and an inflation rate. The fixed rate for a number of years has been zero. So that means you’re only getting a return if there is inflation.
That’s why you haven’t heard much of them in recent years. But that all changed in November 2021 when there was an inflation spike. And although the 30-year fixed rate remained at 0%, the annualized tied-to-inflation rate on these bonds jumped to 7.12% — a solid guaranteed return.
But what people have to remember is that the rate is only locked for six months. Then it’s adjusted again upward or downward, based on the current inflation rate, for the next six months. “So, you are subject to what is essentially, a variable interest rate,” Weinstock says.
As long as inflation stays high, these bonds will pay a solid return. But if inflation falls, coming into line with historical 2-3 percent norms (as the Federal Reserve is trying to get it to do) the variable rate on these bonds will decrease. It can’t go below zero. (You’re not going to owe money if inflation disappears, and what your bond has accrued in interest remains yours to keep.) But the returns can pale in comparison with what you saw, particularly, in 2022. That said, there are tax-advantages as well. You only pay taxes on the bonds when they’re cashed in, and only federal taxes — no state taxes
Understand The Downside
Unlike money you park in a savings account, you can’t cash in an I-Bond for at least one year, and if you sell before five years, there’s a three-month interest penalty. That means if inflation goes down and your interest rate goes down and stocks start to rise, there are likely to be more lucrative investment options elsewhere. In fact, it’s possible that traditional fixed rate bonds are doing as well, or better.
Another hitch is that the amount you’re allowed to buy is capped at $10,000 per year per person (a couple could buy $20,000), although you can buy another $5,000 by using your tax refund to make a purchase directly. If you own a company or other business entity, it can purchase them as well.
Finally, there’s the purchase itself. You’ll need to go online and open an account with TreasuryDirect.gov. While the site looks outdated, there’s a FAQ section to help visitors figure out how to open an account. To get started, you’ll need your Social Security number and email address. You’ll also need to know the routing number of your credit union or bank, and your account number. And FYI: You can’t purchase them as part of an IRA.
Ready To Go?
Weinstock offers another tip to maximize their value: “Buy them towards the end of the month because you’re going to get the compounding for that full month, no matter when you buy it during the month. And whenever you’re going to sell, sell at the beginning of the month because you get an accrual for the month.”
