Suze Orman has long been a fan of I bonds.
Financial guru Suze Orman has been singing the praises of I bonds for years. Although she says they may not be as attractive as they used to be and there are other alternatives, she believes they are still a great investment. But what exactly are I bonds? And why should you consider investing in them? Let's take a look at the ins and outs of these unique savings bonds to see if they're right for you.
What is an I bond?
I bonds are a type of savings bond issued by the U.S. government. I bonds protect you from inflation and are intended to provide a safe, low-risk investment option for individuals. I bonds earn interest for up to 30 years, and the interest is exempt from state and local taxes. The interest is also tax-deferred until you take a withdrawal. The interest rate on I bonds has two components: a fixed rate of return and a variable rate of return that is adjusted for inflation every six months.
The current rate for an I bond issued from November 2022 through April 2023 is 6.89%, which is a step down from the 9.62% offered from May 1 and Nov. 1 of 2022. The fixed rate applies to all I bonds sold during the six-month period. Currently, the fixed rate is 0.40%. The semi-annual (half year) inflation rate is based on the Consumer Price Index and is currently 3.24%. The combined rate is called the "composite rate" or "earnings rate." The only place to buy I bonds is through TreasuryDirect.gov. You cannot purchase them through a typical brokerage firm.
The benefits of investing in I bonds
Suze Orman has long been a fan of these unique savings bonds because they offer so many benefits over other types of investments. For starters, they offer a guaranteed return on your investment, unlike stocks or mutual funds, which may go up or down over time. They have a low minimum purchase amount ($25) which makes them accessible to almost everyone who wants to invest their money wisely.
In addition, because the interest earned from them is tax-deferred until you cash them in (or until 30 years have passed), they can be a great way to save for retirement without having to worry about taxes eating away at your returns each year. Finally, since they are backed by the U.S. government, there's virtually no risk involved. So even if the stock market takes a dive or another economic crisis hits our shores, your money will still be safe with an I bond.
The downsides of I bonds
While I bonds are currently returning close to 7%, the money is locked up for the very first year and can't be touched. In years two through five, the penalty to liquidate is three months' worth of interest. And after five years, you can take your money out any time you want. In a recent podcast episode, Orman stated that I bonds are still a great investment, but rates can go down just as fast as they went up. Since inflation can go up or down, deflation can bring the combined rate down below the fixed rate (as long as the fixed rate is not zero).
Because interest rates have skyrocketed, Orman says a CD or Treasury Bills can offer rates just as high without having to lock in your money for a year. For example, a 6-month CD at Quontic Bank is currently at 5.05% and a 26-week T-Bill is close to 5%. Orman doesn't believe the renewal rate in May will be 6.89% or higher. As inflation goes down, the rate of I bonds will also be going down, since the rate resets every six months. When you take into account the penalty and lower interest rates, Treasury Bills and CDs will likely be better for investors in the long run.
I bonds are an excellent option for those who want to invest their money safely but still reap some rewards along the way. With their low minimum purchase amount, guaranteed return on investment, inflation protection, and tax-deferment features, it's no wonder Suze Orman continues to recommend them. But since she believes I bond rates will most likely go down, CDs and Treasury Bills may be better alternatives for the long run.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.
FAQs
Orman said that she has been investing in them, recommending to her listeners to do the same and allocate a portion of their portfolio to Treasuries, especially shorter-term ones. “I still think it is wise to be investing in the three and six-month Treasury bill,” she added.
Is it worth it to buy I bonds right now? ›
At an initial rate of 4.28%, buying an I bond today gets roughly . 15% less compared to the 4.41% 12-month Treasury Bill rate (August 14, 2024). You could say that buying an I Bond right now is a 'fair deal' historically compared to 2021 & 2022 when I Bond rates were much higher than comparable interest rate products.
What is the downside of an I bond? ›
Cons of Buying I Bonds
I bonds are meant for longer-term investors. If you don't hold on to your I bond for a full year, you will not receive any interest. You must create an account at TreasuryDirect to buy I bonds; they cannot be purchased through your custodian, online investment account, or local bank.
Is there a better investment than I bonds? ›
Unlike I bonds, which pay their interest at redemption, TIPS pay a fixed rate of interest every six months. You can buy millions of dollars' worth of TIPS, and you can sell them on the secondary market if you need to cash in a pinch—although the sale price will probably differ from your purchase price.
What does Warren Buffett say about bonds? ›
His primary focus and reputation have been made around his equity investments, so much so that many wonder if Buffett invests in bonds at all. “It's quite clear that stocks are cheaper than bonds,” Buffett said at an appearance back in 2010.
Should I get out of I-bonds? ›
You'll likely want to time your cash-out for three months after your I-Bond's reset date so that the three months' interest you lose are of the new lower rate, not the higher rate you were happier with. To accomplish that, you should hold your I-Bond for at least 15 months.
Is now a good time to buy bonds in 2024? ›
Investment advisers say now is a fine time for bonds. They are a good investment in 2024, experts say, for the same reasons they felt like a bad investment in 2022.
What is the downside to buying treasury bonds? ›
The major drawback to Treasury securities is their low yield. "Interest rate risk is real," says Alexander Campbell, a registered investment adviser and accredited investment fiduciary with A.G. Campbell Advisory LLC.
What is the projected I bond rate for 2024? ›
May 1, 2024. Series EE savings bonds issued May 2024 through October 2024 will earn an annual fixed rate of 2.70% and Series I savings bonds will earn a composite rate of 4.28%, a portion of which is indexed to inflation every six months.
Is it possible to lose money on an I bond? ›
“With I bonds, your principal is protected and safe. However, if you cash the bond out before five years, then you will lose up to the last three months of accrued interest. So you can't lose what you put in, but you can lose earned interest,” Boxenbaum said.
Investing in I bonds offers retirees significant tax advantages. The interest earned on I bonds is tax-deferred, meaning you don't have to pay taxes on the interest until you decide to redeem the bonds.
How long should you keep money in an I bond? ›
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
Are I bonds better than CDs? ›
If you're stashing cash for just a few years, locking in one of today's historically high CD rates is the better bet. But for long-haul savings, I bonds can ensure your cash is always safely out-earning inflation.
What are the disadvantages of TreasuryDirect? ›
Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.
What is a better option than bonds? ›
Bonds and CDs are both fixed-interest, low-risk investment instruments. CDs are FDIC-insured, but bonds aren't. CDs often have shorter maturity dates than bonds. CDs could be a good fit for short-term investors who don't want to risk losing principal; bonds may be better for long-term investors.
What is the downside to buying Treasury bonds? ›
The major drawback to Treasury securities is their low yield. "Interest rate risk is real," says Alexander Campbell, a registered investment adviser and accredited investment fiduciary with A.G. Campbell Advisory LLC.
Should retirees buy Treasury bonds? ›
Bonds are a retiree's friend, advisers say
Here's the theory: Stocks perform better than bonds in the long run, but they are volatile. Bonds yield lower returns, but they are more stable. “The point of bonds is that they should give you stability, and they should give you income,” through interest payments.
Should I put my money in Treasury bonds? ›
Treasury securities are considered a safe and secure investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be paid on time.
What is the disadvantage of investing in Treasury bills? ›
However, should interest rates rise, the existing T-bills fall out of favor since their return is less than the market. For this reason, T-bills have interest rate risk, which means there is a danger that bondholders might lose out should there be higher rates in the future.
