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Should You Buy I Bonds?

Listen to Best in Wealth Podcast Episode 195

What is an I bond? How do you buy an I bond? What are the risks? Are there risks? Who should buy I bonds? I bonds are a hot topic in the news because of the staggering high interest rates. So in this episode of Best in Wealth, I will answer these questions. I will help you decide if you are the right person to buy I bonds. Listen to learn more!

Outline of This Episode

  • [1:13] Control what you CAN control
  • [6:23] What is an I bond? 
  • [10:40] How to buy an I bond
  • [13:17] The risks of buying I bonds
  • [19:00] Who should buy an I bond
  • [21:17] What are the alternatives?

What is an I Bond? 

“I bond” is just another name for Series I savings bonds. The interest rate on Series I bonds is indexed to inflation. The rate changes every six months based on the previous six months' change in inflation. It resets every May and November. The current interest rate is 9.62% which is extremely attractive. 

If you were to take advantage of the annualized rate of return, you would want to buy them now. You would be locked in at 9.62% for six months. Inflation has been high, so we expect it to be high but will it continue to be? Will it be higher, or lower?

I bonds can protect you from inflation, be used as supplemental retirement income, and can be given as gifts. They are subject to federal taxes. However, they are protected from state and local taxes. You can cancel them after one year. However, if you cancel them before holding them for five years, you lose the previous three months of interest. 

If I bought an I bond today and cashed it out in 18 months, I would only get the first 15 months worth of interest. But that 9.62% interest rate is attractive, right? 

How do you buy an I bond?

If you wanted to purchase an I bond before tax season, you can use your tax refund to purchase I bonds. You would have been issued paper series I bonds, which you are limited to purchasing up to $5,000 per calendar year. You would have filed form 8888 and submitted it with your 2021 tax return. But most people do not buy them this way. How do they buy them?

I bonds are available for purchase electronically, up to $10,000 per calendar year. You need to open an account with Treasury Direct. Once you do so, you will be able to buy and manage all of your bonds purchased from that account. Children under the age of 18 cannot open an account or purchase bonds but a parent can open an account and link it to their account and conduct transactions on behalf of the child. 

The risks of buying I bonds

Is there a risk to this investment? I bonds need to be actively managed. If you buy them at the attractive 9.62% rate and inflation falls off a cliff (it eventually does), where does that leave you? The federal government does everything it can to control inflation by raising interest rates. If you are not managing your I bonds well, you can be stuck with low interest rates. 

At that point, online savings accounts may pay better interest than an I bond. In most brick-and-mortar banks, you will earn about a whopping 6 cents on your $50,000. You might be earning 0.4 or 0.5% with an online bank. As interest rates go up, brick-and-mortar banks are slow to react. Online savings accounts—which are also insured by the FDIC—react faster, letting you earn a higher interest rate. 

Even if you are managing your bonds—and achieving over 9%—what will it reset to in six months? When I look at historical rates, the last couple of resets looked good. It is about an annualized rate of 4%. But when you look back to 1998, I see very few instances where you would be earning much of an interest rate over 1%. I have even seen some negative rates. 

So who should buy an I bond? What makes you a good candidate? Listen to the whole episode to learn who should—and who should not—buy I bonds. 

Resources Mentioned

Connect With Scott Wellens

Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.