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Using I Bonds in your portfolio Thumbnail

Using I Bonds in your portfolio

Chances are, you’ve probably heard about “I Bonds” in the last few months. I Bonds are savings bonds issued by the U.S. Treasury where the “I” denotes the series of the bond and stands for “inflation.”

The reason why you’ve probably heard of I Bonds recently is because the interest rate they pay is based on current levels of inflation. Considering how high inflation has been, I Bonds have become all the rage.

For full details about I Bonds, check out the U.S. Treasury’s website, TreasuryDirect. Also, I did a deep dive into I Bonds in a recent episode of the Retirement Planning Education podcast.

But for those of you looking for a quick and dirty summary of I Bonds, here you go:

  • Background – I Bonds are direct obligations of the U.S. Treasury. They are technically “bonds,” but are functionally more like a savings account in that they are guaranteed to not lose principal and they pay a guaranteed rate of interest.
  • How to buy – I Bonds can be purchased through www.TreasuryDirect.gov or through your tax return refund via filing Form 8888 with your return. If you buy I Bonds directly online, the bonds will exist only in electronic form, through your Treasury Direct account. If you buy I Bonds with your tax return refund, you will receive physical paper certificates.
  • Purchase limit – Each person can buy up to $10k of I Bonds per year through Treasury Direct. Additionally, another $5k can be purchased per tax return. Also, trusts and businesses can potentially buy up to $10k per year. I Bonds can also be purchased as gifts for others.
  • Denominations – when buying online, you can buy anywhere from $25.00 to $10,000.00, in increments as small as $0.01. When buying through your tax return refund, denominations are limited to $50, $100, $200, $500 and $1,000.
  • Registration and beneficiary info – I Bonds can be owned individually (e.g. John Smith), with a “payable on death” beneficiary (e.g. John Smith POD Jane Smith) or jointly (e.g. John Smith OR Jane Smith).
  • Interest Rates – The interest rate paid on I Bonds is a combination of a fixed rate and a variable rate. The fixed rate has been zero for a few years, but the variable rate changes every six months based on the actual changes in inflation (as measured by CPI-U). Furthermore, the interest rate on your I Bond will change every six months. New rates are announced each May 1 and November 1. Currently, I Bonds bought between May 1 2022 and October 31 2022 are paying an annual rate of interest of 9.62% for the first six months.
  • Redemptions – You cannot redeem an I Bond within the first twelve months of its purchase. If you redeem between the first year and the fifth year, you will have to forego the most recent three months of interest. If you redeem after five years, there is no redemption penalty.
  • Taxation – Interest on I Bonds is taxable at the federal level, but not at the state level. You don’t have to pay tax on interest until you eventually redeem some or all your bonds.

While the current 9.62% GUARANTEED annual interest rate is quite high, it can and will change every six months. When inflation eventually subsides, I Bond interest rates will come down accordingly.

With that in mind, I Bonds may not be a great long-term savings or investing vehicle. But if you have some cash that you don’t plan on needing for at least a year, I Bonds can be a great way to park the money, risk-free, while getting some rather high guaranteed interest for a while.