_{Originally published 04/29/2022}

I-Bonds can be a great safe option to consider. It is a fixed income instrument with no default risk, no principal risk, and no inflation risk.

While they have been written about extensively by financial columnists for the last year or so for paying rates above 7% annually, the truth is that I-Bonds pay the same real interest rate today (0% after adjusting for inflation) as they did a in 2010.

The difference today is that inflation is eroding the real value of money in bank accounts, CDs, and other fixed income instruments at a higher rate than a few years ago. Getting 1% interest on a CD while inflation is 2% is disappointing, but getting 1% interest on a CD while inflation is 8.5% is defeating. An I-Bond will guarantee you match the rate of inflation (as measured by the CPI-U).

If I could push a button and buy I-Bonds for all of my clients with ease, I would strongly consider doing so. However, it is not that simple.

The Interest Rate:

• An I-Bond’s interest is a combination of two separate interest rates, a fixed rate and a variable rate. The fixed rate is currently 0% and has hovered around that for a long time now. The fixed rate does not change during the entire holding period of the I-Bond.
• The variable rate is tied to the CPI-U (currently 7.12% annualized) and changes every 6 months, even throughout your holding period. Interest compounds every 6 months.
• You cannot lose money in an I-Bond.
• All the interest is tax-deferred and not considered taxable until the bond is redeemed.

The Holding Period:

• You must own the I-Bond for 5 years to avoid a penalty on redeeming it. It can be redeemed after 1 year of holding, but you have to forfeit interest from the previous 3 months for doing so.
• You can hold the I-Bond and earn interest for up to 30 years.

Purchase Requirements:

• $25 minimum purchase for electronically issued I-Bonds.
• $10,000 maximum annual purchase (electronically issue) per Social Security number.
• A married couple could purchase $10,000 each during a year.
• If you have an LLC you could purchase another $10,000 for the LLC.
• If you have a revocable living trust you can buy an additional $10,000 in the name of the trust, even if it is reported under your Social Security number.
• Electronic bond purchases must be done through Treasurydirect.gov, but since the interest is tax-deferred you will not need a 1099 from them until you redeem the bond.
• You can buy up to an additional $5,000 in paper I-Bonds if you have a tax refund coming from filing your federal tax return. You’ll need to complete IRS form 8888 and include it when you file.
• I-Bonds cannot be held in a brokerage account. They can be held in paper form or electronically through the TreasuryDirect website.

Other Thoughts:

Stocks for the long run are still a good bet, but for safe money the I-Bonds can make a lot of sense. Depending on one’s net worth it may not move the needle a whole lot to invest $10k in I-Bonds, but it’s always good to evaluate what options are out there and if they make sense for yourself.

Like every other financial account one may have, it is important to structure the beneficiary designations properly on I-Bonds.

It would not be surprising if the variable rate component of I-Bonds was significantly lower a year from now, but that would mean inflation is now lower and you are still maintaining your purchasing power. It’s all relative.

If you’re considering purchasing I-Bonds, you may want to wait until May as the new variable rate is projected to be higher for bonds issued starting in May.