Should You Be Buying I Bonds now?

Russell W. Hall, CFP®

After years of earning little-to-nothing on savings, yields are finally on the rise as the Federal Reserve continues to raise rates.  But even those increased payments (currently around 2.8% per year on money market funds and close to 4% for one-year CDs and Treasury Bills/Notes) aren’t enough to keep up with inflation.  To have a better shot of matching inflation, you may be thinking about investing in I Bonds – but is it worth doing?

I Bonds is short for “inflation-protected savings bonds”, issued by the US government and only sold through www.treasurydirect.gov.  These bonds have 30 year maturities and have two components – a fixed interest rate, and a rate that adjusts twice a year with inflation, based on the CPI-U.  Interest is compounded, so each adjusted rate is paid on the increasing value of the principal, and it’s federally tax deferred until the bonds are cashed in (and free from state and local tax).

You are also not locked in to owning the bonds for 30 years – you can redeem them after 12 months and get your money back, although you’ll forfeit 3 months of interest.  If you hold the bonds for at least five years, there’s no penalty.

There are some other downsides.  You can only purchase $10,000 per Social Security number, per year, and accounts cannot be comingled.  You could actually purchase an additional $5,000 per year with your tax refund if you file the correct paperwork, but Morningstar’s John Rekenthaler recently pointed out that those $5,000 bonds must be in paper form and not electronically registered like your other I Bonds.

There can be problems with I Bonds being cumbersome for estate planning, with a reportedly difficult process for adding secondary beneficiaries.  Also, because the inflation-linked rate is adjustable, the current high rate of return (about 9.6% as of this writing) may not last.  Already, the next adjustment looks to be roughly 3% lower based on current inflation numbers. 

So, should you invest in I Bonds?  The answer is probably, if you’re looking for longer-term cash management for money that can be tied up for at least a year.  We’d also add that you should be comfortable opening and managing online-only accounts (and government ones, at that). 

You should also consider whether it’s worth the trouble.  Buying a $10,000 one-year CD paying 4% would earn you $400, while owning an I Bond for a year should currently pay close to $780 (after rates adjust).  Whether that’s valuable enough to put up with some of the issues is up to you.   

If you are trying to make a decision about I Bonds or anything else related to your financial situation, we’re ready to help.  Schedule a 15-minute discovery call with a fee-only financial advisor.