I Bonds: An Attractive (At Least for Now) Savings Tool

Nobody should be surprised that savings accounts aren’t paying much of anything right now—they’re at essentially 0% interest, which is not attractive under any market environment, but is even more unattractive now, with current inflation at over eight percent. While it is extremely important to keep funds you need in the short-term parked in the bank for easy access, I bonds are one option worth considering for those with extra cash they don’t need to use in the next 12 months.

An I bond is a US Treasury security that calculates interest based on the current inflation rate and resets after each six-month period. During times of higher inflation, you may want to consider taking cash you’ve set aside and using it to purchase I bonds as a way to offer some protection against inflation and the resulting loss of value of the money you have sitting in the bank. Some key points are important to consider in regards to how I bonds work.

1. I bonds are composed of a fixed rate and an inflation component. The fixed rate, currently 0%, is maintained for the lifetime of the bond. The inflation component is adjusted two times per year, in May and November. The current combined interest rate is 7.12% and is expected to rise to approximately 9.6% in May. If you purchase an I bond today (April) you’ll earn 7.12% for six months and then earn the May rate (expected to be 9.6%) for the following six months. In addition, the interest is compounded semi-annually, so the interest the bond earns in the previous six months is added to the principal and then interest is earned on that new principal. I bonds accrue interest until the bond reaches 30 years or you cash it.
2. Each individual can buy up to $10,000 in I bonds per calendar year per social security number.
3. You can cash in an I bond any time after 12 months; however, if you do so within the first five years of holding, you lose three months’ interest.
4. I bonds are subject to federal income tax when you cash them in (you also have the option to report the interest annually on your tax return), but they are not subject to state and local taxes. Also, if your income is below the cut-off set by the IRS, you can exclude the interest paid upon redeeming the bond if you use it for qualified higher education expenses.

So, although they may seem like a no-thrills, boring investment option, US Treasury I bonds look pretty enticing right now! Again, these bonds are worth considering for cash you don’t expect to need in the next year; they aren’t a substitute for long-term investing. If you are interested in purchasing an I bond, you can do so directly from the US Treasury website: https://www.treasurydirect.gov/.

As always, your team at Bluerock is here to help answer any questions.