How I Bonds Can Help You Fight Inflation
New issues pay an initial rate of 9.6 percent, but there are restrictions you need to know about
As inflation continues to surge, a long-ignored government savings bond could be a great deal right now.
Inflation-adjusted savings bonds, known as I Bonds, are 30-year bonds with an interest rate that changes every six months based on the country’s main inflation gauge, the Consumer Price Index. (The April CPI, released Wednesday, showed that prices rose at an 8.3 percent annual rate.)
Right now, I Bonds are paying an annual rate of 9.62 percent through October, which works out to at least a 4.81 percent return over the next six months—and probably more, if inflation remains high.
That interest rate is the highest that I Bonds have paid since they were launched in 1998, and it far exceeds the recent rates for one-year CDs, recently averaging 0.23 percent, and online savings accounts, which might pay as much as 0.60 percent.
How I Bonds Work
Like regular savings bonds, I Bonds pay monthly interest, which starts from the first day of the month you make the purchase. So if you buy a bond late in the month, you’ll get the interest for the entire month, says Allan Roth, a CPA and certified financial planner in Colorado Springs, Colo.
That interest accrues over 30 years or until you cash in the bond. (As with regular savings bonds, interest isn’t paid out separately.) Taxes on the interest can be deferred until you pull out your money.
Calculating the interest you earn can be tricky, because I Bonds actually have two rates, which are reset semiannually in May and November. There’s a fixed rate that lasts for the life of the bond you purchase. This rate, which is set by the U.S. Treasury Secretary, has been pegged at zero percent for the past two years. During 2019, the rate was set at 0.50 percent and 0.20 percent.
I Bonds also have a variable rate, which is based on changes in the CPI over the months before the reset date. As noted earlier, that rate now stands at 9.62 percent.
Investors who purchased bonds between last November and April 2022, when the variable rate was an annualized 7.12 percent, and hang on to them through October will earn 8.54 percent over 12 months, Roth says. On a $10,000 investment, that would come to $854. Those who bought bonds when the fixed rate was higher will earn even more.
There are some restrictions on I Bonds. You can’t make a withdrawal during the first 12 months after your purchase. And if you cash out during the first five years, you’ll pay a penalty of three months of interest.
One key benefit to the bonds: You can defer taxes on the interest you earn until you cash them out. At that time, you’ll owe federal income tax, but I Bonds aren’t subject to state or local income tax. (You can also choose to report the interest every year.)
For those paying for college, you may qualify for an education tax break, which will let you exclude some or all of the interest on redeemed I Bonds from federal income tax. For more details, see IRS Form 8815 (PDF).
How to Buy I Bonds
In most cases, to purchase I Bonds you must open an account at the government’s TreasuryDirect website. There’s a $10,000 annual per person limit for I Bond purchases. (For married couples, each spouse can buy up to $10,000 in these bonds.)
But if you qualify for a tax refund, you can purchase up to $5,000 more by electing to receive some or all of that refund as I Bonds. Those bonds will arrive as paper certificates, which you can convert to electronic form.
When buying I Bonds through TreasuryDirect, you can invest as little as $25; for tax refunds, the purchases come in increments of $50. If you buy online, you can invest any specific amount, down to the penny, until you reach the $10,000 maximum. For paper bonds, you can buy in increments of $50, $100, $200, $500, and $1,000.
It’s possible to buy additional I Bonds to give as gifts. But you must have the recipient’s Social Security number. And the beneficiary must also have a TreasuryDirect account in order to receive the gift. Children under 18 can’t open a TreasuryDirect account, although they can own I Bonds. Parents can open the account for them, linking their account to the child’s, which will allow them to buy bonds in the child’s name.
Fair warning: Many savers find the TreasuryDirect website outdated and clunky to use. “It may remind you of Myspace,” says David Enna, founder of Tipswatch, a website that provides information about I Bonds and TIPs (Treasury Inflation-Protected Securities).
And some tasks may be difficult to execute. For example, if you want to change the bank checking account linked to your TreasuryDirect account, you must print out a form, take it to the bank, and get a signature guarantee.
The U.S. Treasury is in the process of developing an update to the website to give users “a positive customer experience,” says John Rizzo, a spokesperson. Still, no timetable has been announced for the website revamp.
Tracking Your I Bonds
You can keep tabs on your I Bond purchases through your TreasuryDirect account, which will show the value of your current holdings. For those with paper bonds, you can use Treasury’s savings bond calculator.
Keep in mind that you won’t receive regular statements about your TreasuryDirect account as you would with brokerage or bank accounts, although you’ll get a 1099 tax form if you redeem your holdings.
That’s why financial planners recommend that you let your trusted family members know about your account and mention it in your estate plan in the event you can no longer manage it yourself. You may also want to consider designating an heir to the account, who would be able to redeem the money if you pass away.
“These are 30-year bonds, and a lot can happen in that time,” Roth says.
But with any luck, your savings will be able to keep up with inflation through those years.