The recent surge in inflation has sparked a new interest in I-bonds. In fact, questions about I-bonds are just about the most common ones I get these days! So, I thought it was time to explain more about the pros and cons of these particular investment vehicles.
What are I-bonds?
I-bonds are US government savings bonds where the interest rate is tied to the level of inflation. As a savings bond, these instruments are backed by the US government, so the principal is safe. In addition, gains are exempt from state taxes, but not federal taxes unless the proceeds are used for qualified higher education expenses. And the current interest rate on these bonds is 9.62% which is the highest rate on these bonds ever!
So What is the Catch?
As you might expect when something sounds too good to be true, there are a few catches:
- Investors are limited to buying no more than $10,000 of bonds per year.
- The bond must be held for at least 1 year, and there is an interest penalty if the bond is cashed out before the end of 5 years.
- The interest rate is reset every 6 months, so the current rate is very unlikely to last. As a point of reference, the rate 12 months ago was 3.54%.
One Last Caveat
I-bonds cannot be purchased through an investment account or through a bank. The only place to purchase any savings bonds including I-bonds is through the government website TreasuryDirect. One of my clients who used this website expressed frustration with the level of support with things like trying to remember or change your password. This is alluded to on the front page of the website in the following Special Announcement:
“Heavy volume is slowing our response time to calls on the phone and cases sent by mail. You can call us from 8 a.m. to 5 p.m. ET, Monday through Friday. Please expect long wait times if you need an agent. Cases you send by mail may take us as long as 13 weeks to process.”
So, if you do go ahead with purchasing these instruments on the website, you might want to write your password down!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Neil Manning, CFP, AIF, CDFA, FSA
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014. Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong). For more details about my background, check out my website below.