It is May 17, 2022, and the current market is down, down, down. This applies to both stocks and crypto. Putting money in the market can be scary for short-term holders (although it’s a sale for long-term holders!). Plus, buyers in the housing market are slowing down with interest rates at nearly 6%, double what it was for the past two years. Meanwhile, the inflation rate is up, with an April-to-April rate change of over 4%, which makes holding onto cash unideal. For those near retirement (5 years out or less) or those saving for shorter term goals and want their wealth to grow, there is a solution in I Bonds! I Bonds are low-risk, inflation-protected assets that are currently yielding a 9.6% annual return until October 2022. This makes I Bonds a great investment option right now. Here is what you need to know about I Bonds.
What You Need to Know About I Bonds
I Bonds are an inflation-protected asset. While inflation remains high, I Bonds will likely continue to see high interest rates. In November 2021, the I Bonds had a guaranteed 7% interest rate. Just this month, the interest rate bumped up to 9.6% and will remain at that rate until October 2022.
The I Bond interest rate is determined by a fixed rate and the inflation rate. Currently, the fixed rate is at 0%, and the inflation rate is at 4.3% for the next 6 months. This is how we get to 9.6% annual rate of return. The interest rate renews every 6 months. It will remain at 9.6% until October, when the rate will change. If inflation goes up, then the rate will go up, too.
I think everyone should be considering I Bonds right now. But before you buy, here are a few things to note.
You can invest $10k per person/entity per calendar year into I Bonds. I have also heard that you can invest an additional $5k in paper bonds directly from your tax return.
Per entity means if you own a business or a living trust, you can invest $10k in I Bonds on behalf of those entities as well.
The interest rate is redetermined every 6 months.
I bonds cannot be cashed for at least 12 months (1 year). Do not tie up money that you need in 6 months, for example. Do not tie up your emergency fund into an I Bond either. Look at it as a short-term investment. If you are looking to buy a house at a moment’s notice, I Bonds are not the option for you. However, if you wish to buy a house next year, then definitely consider it!
The life of the investment is 30 years. But the money can be pulled out any time after 12 months.
There are no penalties for pulling the money out before the 30 years are up if it has been in the I Bond for at least 5 years.
If the money is pulled out between years 1 and 5, you lose the interest gained from the last three months. This doesn’t sound terrible to me. For example, I can buy $10k in I bonds right now with the plan to pull it out in a year. I will gain 6 months of interest at 9.6% and 3 months of interest at the percent determined in November 2022. I can still beat the current market.
There is no state tax on I Bonds.
There is a federal tax on the gains, but one way it can be federal tax exempt is if you use the money from your I Bond to pay off higher education costs from a list of approved institutions, including paying off your student loans! However, there are requirements. For example, you cannot file married filing separately. Income requirements also apply. Single tax filers must have an adjusted gross income less than $94,550. Married tax filers must have an adjusted gross income less than $149,300. I would definitely check out the rules on this page.
Who Could Benefit from I Bonds
I Bonds can be a useful tool for multiple financial situations. Whether you are a college graduate looking to pay off student debt, a high school graduate just starting college, parents who want to start a college fund, a young couple saving up for a home, an almost retiree looking to earn in your last five years of working, or a short-term investor unhappy with the current state of the market – all of these people may want to consider I Bonds.
Trying to decide what to do with the rest of your cash? Why not consider a High Yield Savings Account? If you happen to choose toopen a Marcus High Yield Savings Account using my referral link, you canreceive an additional 0.20% Annual Percentage Yield (APY) on your Online Savings Accounts for 3 months. Learn more about HYSA in my post below.
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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.
I bonds can be a safe immediate-term savings vehicle, especially in inflationary times. I bonds offer benefits such as the security of being backed by the full faith and credit of the U.S. government, state and local tax exemptions and federal tax exemptions when used to fund educational expenses.
A series I bond is a non-marketable, interest-bearing U.S. government savings bond. Series I bonds give investors a return plus inflation protection on their purchasing power and are considered a low-risk investment. The bonds cannot be bought or sold in the secondary markets.
The interest rate on I Bonds can change every six months after your initial purchase of the bond, based on inflation. If inflation runs hotter, the rate can go up. If inflation cools off, the rate can go down. The fixed rate portion of an I Bond remains with the life of the 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.
Is interest income from I bonds taxed as capital gains? No, the interest income earned from I bonds is not considered a capital gain and is therefore taxed differently. Instead, it is taxed as regular income at the federal level and exempt from state and local taxes.
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. The EE bond fixed rate applies to a bond's 20-year original maturity.
Inflation risk is an issue because the interest rate paid on most bonds is fixed for the life of the bond. As a result, the bond's interest payments might not keep up with inflation. For example, if prices rise by 3% and an investor's bond pays 2%, then the investor has a net loss in real terms.
The Catch. You can't redeem the bond until at least 12 months have passed and if you redeem the bond before it is five years old, you lose the last three months of interest.
Can I buy I bonds every calendar year? Yes, you can purchase up to $10,000 in electronic I bonds each calendar year. You can also buy an additional $5,000 in paper I bonds using your federal tax return.
Since January 1, 2012, paper savings bonds are no longer available at banks or other financial institutions. Paper Series I bonds can still be bought with IRS tax refunds, but Series EE bonds are available only in electronic form. There are two types of savings bonds currently available.
Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity. When the TIPS matures, if the principal is higher than the original amount, you get the higher amount. If the principal is equal to or lower than the original amount, you get the higher original amount.
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.
Investment-grade corporate bonds remain attractive given their lower risk and relatively high yields. Long-term investors who can handle volatility might consider high-yield bonds and preferred securities, but we wouldn't suggest large positions in either.
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.
Cons. Bonds are sensitive to interest rate changes. Bonds have an inverse relationship with the Fed's interest rate. When interest rates rise, bond prices fall.
Introduction: My name is Aracelis Kilback, I am a nice, gentle, agreeable, joyous, attractive, combative, gifted person who loves writing and wants to share my knowledge and understanding with you.
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