Is An I-Bond Right For Me?

What Is An I-Bond?

The Inflation Conversation's Creating Curiosity For series I-Bonds.  Here's What You Need To Know About Series I-Bonds

We haven't had the "inflation conversation" for 40 years.  Now that it's top of mind, I've been getting many questions about series I-Bonds.  What are they, and how do they work? Here are some pros and cons of I-Bonds to help you discern if they're right for you.

Series I-Bond Defined

An I-Bond is a series-I savings bond issued by the U.S. Treasury. The interest rate is based on inflation. For instance, the interest rates are adjusted for inflation every six months – in May and November.  The interest earned is exempt from state and local income tax, making it an attractive investment for investors living in high-tax states and cities.

If the inflation rate stays high, these bonds will yield a competitive interest rate. But, if the inflation rate declines, the yield rate will be reduced on the next scheduled adjustment. The rate will not go below zero, and you retain any accrued interest.  

Earned interest is added to the value of the bond twice per year. This means the principal amount you earn interest on increases every six months, positioning your money to compound over time.

Where To Buy Series I-Bonds

Investors can buy up to $10,000 worth of  series I-Bonds annually through the government’s TreasuryDirect website. You can purchase another $5,000 with your tax refund, increasing the annual total purchase amount of series I-Bonds to $15,000 per person.

I-Bonds cannot be held in a retirement account, or in an investment account.  They can only be purchased through the government's website.

Is An I-Bond Liquid?

A series I-Bond is not considered a liquid investment.  I bonds have a maturity of 30 years. They carry a 20-year original maturity period immediately followed by a 10-year extended maturity period.

Here are some things to keep in mind if you choose to sell an I-Bond before it matures -

  • An I-Bond cannot be cashed for one year after purchase.
  • If the bond is sold before the fifth anniversary, the prior three months of interest are forfeited.
  • The bond can be sold after the fifth anniversary without penalty.

Smart Money Soundbytes For I-Bonds

I bonds have the potential to protect the purchasing power of your cash from inflation. For example, when prices rise over time, your purchasing power shrinks.  It takes more money to buy the same goods and services.  An inflation-hedged investment like I-Bonds can help you maintain the spending value of your cash.

Remember, you can only purchase them from the U.S. Treasury in various denominations up to $10,000.

Here are two tips for when to buy and sell I-Bonds, if they align with your long term investment goals,

  • Buy them towards the end of the month because you’re going to get the compounding for that full month, no matter when you buy it during the month.
  • Sell at the beginning of the month because you get an accrual for the month's interest.  

Securities offered by the U.S. Treasury have a low risk of default, and, as noted above, I-Bonds offer attractive tax benefits. Interest payments are exempt from state and local taxes.  In some cases, they may be federal tax free if they are used to pay for college tuition and fees at an eligible institution.

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About the author 

Therese Nicklas

Therese Nicklas is a CERTIFIED FINANCIAL PLANNER™, Certified Money Coach(CMC)®, and Certified Success Principles™ Coach. She specializes in helping executive women who are at a crossroads and feel uncertain about their next steps. By empowering them with smart money strategies, they learn how to build their new big, bold life with certainty, clarity, and confidence. She is passionate about inspiring women to design a fulfilled, intentional life. “True wealth – true financial freedom – is being free to focus on the things that matter most to you – what money can’t buy.” Her motto – “live your life by design and not by default”.

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