Bonds are not a short-term investment. They carry more risk than cash, but at a higher return than cash yet a much lower risk than equities, and without a specific date to use them, the higher return over multiple decades is why they're generally recommended over cash.
The biggest red flag for short-term investors: You can't redeem these bonds for a year after you purchase them, and you'll owe a penalty equal to three months' interest if you cash out any time over the first five years of owning the bond.
I Bond Cons
The initial rate is only guaranteed for the first six months of ownership. After that, the rate can fall, even to zero. One-year lockup. You can't get your money back at all the first year, so you shouldn't invest any funds you'll absolutely need anytime soon.
Sitting in cash also presents an opportunity cost as it forgoes potentially better investments. Bonds provide interest income that often meets or exceeds the rate of inflation, and with the potential for capital gains if bought at a discount.
I bonds have never been popular due to low interest and low inflation rates. However, inflation has increased, making these safe bonds more attractive. The cap at $10,000 and the annual interest of $689 might not be worth the hassle of owning and keeping up with a separate account.
Normally, you're limited to purchasing $10,000 per person on electronic Series I bonds per year. However, the government allows those with a federal tax refund to invest up to $5,000 of that refund into paper I bonds. So most investors think their annual investment tops out at $15,000.
Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.
Bonds, especially bonds from governments and major companies, also tend to be a safe investment. They can also offer much higher return than savings accounts. In exchange for the higher return, you give up flexibility because you cannot redeem bonds at any time.
These federal bonds have a guaranteed return which is adjusted based on inflation. The next adjustment will be coming soon. The experts at Vanguard recommend I bonds along with high-yield bonds and municipal bonds as investments in 2022.
inflation rate can vary. You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline.
Inflation sucks, but there is one upside: It's still a great time to buy a government-backed I bond. Series I savings bonds are conservative, safe investments that rise and fall with inflation, and they're earning far more than the best high-yield savings account or certificate of deposit.
I bonds can be a safe immediate-term savings vehicle, especially in inflationary times. I bonds offer benefits such as the security of being backed by the full faith and credit of the U.S. government, state and local tax-exemptions and federal tax exemptions when used to fund educational expenses.
It has been a long time coming, but 2023 looks to be the year that bonds will be back in fashion with investors. After years of low yields followed by a brutal drop in prices during 2022, returns in the fixed income markets appear poised to rebound.
Series I bonds do offer some tax advantages, too. Interest on the bonds is exempt from state and local taxes, though you'll still have to pay federal taxes on the gains. And using the interest to pay for higher education may help you avoid paying federal taxes on the interest income, too.
Series I bonds are considered low risk since they are backed by the full faith and credit of the U.S. government and their redemption value cannot decline. But with this safety comes a low return, comparable to that of a high-interest savings account or certificate of deposit (CD).
Another advantage is that TIPS bonds make regular, semiannual interest payments, whereas I Bond investors only receive their accrued income when they sell. That makes TIPS preferable to I Bonds for those seeking current income.
In general, diversifying into bonds can provide a cushion that helps protect investors from the full impact of a stock market downturn. However, it's essential to be alert to the fact that certain bond market products, including bond funds, are likely to suffer losses when stocks fall.
There are two ways that investors make money from bonds. The individual investor buys bonds directly, with the aim of holding them until they mature in order to profit from the interest they earn. They may also buy into a bond mutual fund or a bond exchange-traded fund (ETF).
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.
$10,000 limit: Up to $10,000 of I bonds can be purchased, per person (or entity), per year. A married couple can each purchase $10,000 per year ($20,000 per year total). 7.12% interest: The yield on I bonds has two components—a fixed rate and an inflation rate.
The composite rate for I bonds issued from November 2022 through April 2023 is 6.89%.
Interest earned on I bonds is exempt from state and local taxation, but owners can also defer federal income tax on the accrued interest for up to 30 years.
Regarding timing, as long as your money is in before the end of the month, you'll earn interest for that month. You don't earn any more interest by investing on the 1st of the month as opposed to the 31st.
Buying paper Series I savings bonds
The only way to get a paper savings bond now is to use your IRS tax refund. You can buy any amount up to $5,000 in $50 increments. We may issue multiple bonds to fill your order.