In this Let’s Get Personal post we venture into the bond pool, specifically Series I Savings Bonds. Let’s talk about what they are and why you might want them on your Balance Sheet.
The What
Series I Savings Bonds or I bonds are a type of U.S. savings bond designed to protect the value of your cash from inflation. With U.S. inflation at an all-time high, Element understands how important it is to protect your cash savings and make sure your emergency fund is preserved.
The interest rate on I bonds is tied to inflation and you currently can buy I bonds at a rate of 9.62% through October 2022. When we compare the I bond rates to current savings account rates, you are able to receive a higher yield on any I bonds purchased compared to cash.
Now, let’s take a look deeper at what I bonds are.
I bonds are a low-risk investment issued by the U.S. Treasury to protect your money from losing value due to inflation. Interest rates on I bonds are adjusted regularly to keep pace with rising prices. In addition, I bonds are exempt from state and local income taxes, which is very appealing for investors who live in highly taxed states and cities.
Contribution Limits
Investors can buy up to $10,000 of I bonds annually directly from the U.S. Treasury via their website. I bonds need to be purchased in an individual account and you can also buy them for minors if you choose.
Interest Payments
I bond interest is calculated based on using a combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year. The rate that you buy your bonds at is applied to for the six months after the purchase is made, even if the rate changes during that time period. An I bond earns interest monthly until the bond matures in 30 years or you cash it in, whichever comes first.
The interest you earn is added to the value of the bond twice per year (also known as compounded semiannually). This means that even though the interest accrues daily it will only be applied to your account once every six months. The interest will compound over time and you will be able to earn interest on the accrued interest that was already applied to the account.
Maturity
You must hold the I bond for at least 12 months and need to own the bond for at least five years to receive all of the interest you earned. If you choose to cash the bond before it is five years old, you will lose the last three months of interest. There is no interest penalty for cashing in the bonds after they are five years old.
Taxes & Gifting
I bonds are exempt from state and municipal, but not federal, income taxes. If they’re used to pay for qualified higher education expenses, however, I bonds may be completely tax-exempt. Owners can choose to pay taxes on the interest earned annually, at maturity or when the bond is cashed. I bonds are not exempt from any estate or inheritance taxes that your state may have.
The owner of the bond is liable for the tax payments, regardless of who purchased the bond. So if you received an I bond as a gift, you are responsible for the tax payments.
The Why
The benefit of I bonds is that they protect the purchasing power of your cash from inflation. With prices rising and your buying power decreasing, I bonds can help you maintain the value of the cash position over time.
Securities offered by the U.S. Treasury are considered to be generally safe with a very low risk of default.
I bonds can be a good choice to include as part of your cash allocation to earn a guaranteed interest rate and help protect your buying power over time.
I Bonds do not offer regular investment payments but instead provide principal and interest at maturity, or when cashed out. They do not offer daily liquidity, must be held for a minimum of 1 year, and have a variable interest rate. There are penalties associated with redeeming bonds before maturity.