What's the deal with these "I-bonds"?
What are I bonds?
Series I Savings Bonds are a U.S. saving bond that earns interest based on combining a fixed rate and an inflation rate. They are as close as you can get to a “risk-free” investment as they are backed by the U.S. government.
How to buy I Bonds
I Bonds are purchased through the U.S. Treasury website www.treasurydirect.gov
There is a limit of $10,000 per person each year. Plus an additional $5,000 in I Bonds if you use your tax return.
You can buy them for your kids
You can buy them through a business or trust
How is the interest rate determined?
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. For example, for bonds issued from May 2023 through October 2023, the combined rate is 4.30%.
The interest rate is determined every 6 months and compounded semiannually.
The inflation component of the interest rate is based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.
How liquid are I Bonds?
You can cash the bond after 12 months. However, if you cash the bond before it is five years old, you lose the last three months of interest.
Is the interest taxable?
Federal: Yes, unless used for education expenses. See: www.treasurydirect.gov then “Education Planning”
State and Local: No
You can elect to report interest each year, or defer reporting interest until you cash in the bond (1099-INT)
When to consider using I Bonds
These could be a good solution for:
• Part of your emergency cash reserve bucket
• 1-4 year savings goals (as long as you factor in the 3-months of interest lost when redeemed)
• In lieu of making additional principal payments on low interest loans (such as a mortgage), in exchange for the higher interest payments
• Systematic building of savings – the website allows for periodic purchases (such as monthly)
Be sure you are comfortable with holding the savings bond(s) at least one year
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