The post-pandemic economic environment has been a headache for investors, with rising interest rates putting the hurt on both the stock market and bonds, an unusual double whammy that has people scratching their heads on the best places to put their money.  On top of this, if you want to keep your money on the sidelines by parking it in savings, you are liable to suffer a devaluation of your cash due to the highest inflation we have seen in 40 years.  This is called inflation risk.

I’m wary about investing the conservative portion of my portfolio, but don’t want inflation to degrade its value, what can I do?

For long-term investors, the plan is to stay the course and stick to the plan they crafted with their Financial Advisor to reach their goals.  The market is cyclical, and timing it is futile at best.  However, there are risk-averse investors that want a safe investment and don’t need the earnings from their investment for a few years, as well as those that are specifically concerned about hedging their portfolio against inflation.  In an environment of high inflation and a stagnant market, I Bonds may be a good option for part of your money.

How do I Bonds work?

I Bonds are considered a long-term investment, with a fixed rate that lasts for 30 years, meaning that you are guaranteed that rate for three decades.  The kicker is that the fixed rate is compounded with an inflation rate that is tied to the consumer price index (CPI) and adjusted every six months, May 1^st and November 1^st.  At the time of this writing the compounded rate was 6.89%, not bad for a US government-backed investment!  You are guaranteed your principal that you initially invested in the bond, as well as the compounded interest that is added to the principal every six months.

How are I Bonds taxed?

There are some tax benefits to I Bonds, they accumulate tax-deferred, however the bill, taxed as ordinary income, can be paid each year, or you can wait until redeeming the Bond to pay the Federal Taxes.  If you live in a state like Illinois with income tax, the earnings are exempt from state and local taxes.  If certain income requirements are met, I Bonds that are used to pay for education are exempt from taxation altogether, making them a viable option for funding higher education for lower-income families.

How can I buy them?  Are there any limitations?

To purchase an I Bond, you will need to set up an account at TreasuryDirect and this will allow you to directly purchase a wide variety of government treasuries, including Bills, Bonds, Notes, TIPS, and STRIPS, which of course includes I Bonds.  This is the only way to purchase them, they are not available from a brokerage and are not tied to mutual funds or ETF’s.  You will need your social security and driver’s license numbers, as well as your bank account information, and takes about 15 minutes to complete.  You can purchase $10,000 maximum per social security number each year, as well as an additional $5,000 if you receive that much as a tax refund.  This is a significant limitation, but if maximum purchases are made every year for an extended period of time, I Bonds can represent a large portion of a person’s cash allocation, all protected against inflation during retirement.

When can I redeem them?

You don’t need to hold an I Bond for 30 years, you can redeem them after 12 months, but you will forfeit the last 3 months of interest if you redeem them before 5 years.  A good rule of thumb is to plan to hold them at least two years.  For help in incorporating I Bonds and other Treasuries into your portfolio, a Financial Advisor can help you determine the best allocation of these reliable and unique investments.  For more information on how we can assist you please visit our website, or click here to schedule a free consultation.