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It is not surprising if you have never heard of Series I savings bonds, aka I bonds, but now see news about them everywhere. As savings bonds with rates tied to inflation, they have not been appealing to most investors during the past few decades when inflation has remained relatively low. Now that inflation is rising, I bond rates are increasing, making them worth considering as an investment option. 

What Are I Bonds?

Series I bonds are savings bonds issued by the U.S. Treasury. They were created in 1998 to guard against inflation impacts by issuing higher interest rates when inflation is high. Their annual interest rate is a combination of a fixed rate and a rate tied to inflation determined by the treasury. Even though the fixed rate is currently zero, the inflation rate is unprecedentedly high.

What Do I Need to Know About Purchasing I Bonds?

Before rushing to purchase these savings bonds, it’s essential to understand the regulations. For example, you must own the bonds for five years and cannot cash out during the first year, or you will forfeit the prior three-months earnings. The bond’s maximum maturity date is thirty years, comprising a twenty-year original period plus a 10-year extension. 

The maximum amount allowed is $10,000 plus another $5,000 if tax refund money is used. 

Understand that this is per person in the household, including your spouse and kids. Businesses can buy bonds as well. Plus, you can gift $10,000 in electronic and $5,000 in paper bonds to as many individuals as you want, understanding that it counts towards the annual gift limit.  

The bond’s interest rate will reset every six months based on inflation data. As for taxes, purchasers will be taxed on the interest earned annually, at maturity, or when the bonds are cashed out. Unless used for secondary education, then the bonds will be tax-exempt. 

Why Now?

I bonds purchased through October 2022 will yield 9.62 percent for the next six months and remain high as long as inflation does. And the rate is determined in part by the U.S. Bureau of Labor’s Consumer Price Index. This measurement shows that while gas prices are coming down and increases across the board have been less drastic in recent months, food and essential goods continue to rise. 

Overall, I bonds are low-risk investments when the general market is declining or volatile. While the market historically climbs over time, many sectors have recently slowed, stalled, or declined. Choosing a federally-backed bond that ensures you won’t lose money may be a more secure investment option, especially for those nearing retirement. Plus, I bonds are subject to federal income taxes. Still, they are exempt from state and local income taxes, making them particularly attractive for people living in states with high-income taxes. 

Suppose you are a parent or grandparent with children likely to go to college in the future. I bonds are worth a look as they are tax-exempt if used for higher education. If rates remain high, putting some college savings not already in a 529 plan into an I bond will earn more money than a regular savings account. 

Why Not Now?

If inflation slows and the market rebounds, other investments will do better. And, no matter what the economy does, investment experts don’t suggest moving all investments to I bonds. A diversified portfolio is always best. With the S&P 500’s average returns of 14.7% for the past decade, the stock market is generally the winner. This axiom is especially appealing for younger investors with years to grow their portfolios. 

Another downside of I bonds is the lack of flexibility. Remember that you cannot cash out bonds within the first five years without losing some of your gains. This strategy is not for quick wins or if you may need to pull out money in the next few years.

Due to the limits, I bonds may not be a sound plan for investors with large portfolios. However, gifting bonds to grandchildren, nieces, nephews, or others may be a secure way to give towards their financial future. 

How to Buy I Bonds?

Bonds can be bought online at TreasuryDirect or when filing your taxes and using IRS Form 8888. The Treasury Direct site also provides valuable information such as a product overview,  current interest rates, and explanations of how the I bond rate is calculated

Are i Bonds the right investment strategy for you? Now may be the right time to put some money into this secure investment option while inflation rates are high, especially if you are nearing retirement or as part of a college investment plan.