I Bonds are superior as a short-term investment of 1 to 2 years because of their backward-based interest rate and predictable return. But TIPS right now are a superior longer-term investment, based solely on these historically attractive real yields.
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.
Like I Bonds, TIPS include an element of inflation protection. An important distinction, however, is that TIPS' principal values are adjusted to incorporate the current inflation rate, whereas I Bonds receive an adjustment in their interest rates to reflect inflation.
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 bonds have a 6.89% interest rate until April 2023. The interest rate will likely change in six months. If rates stay the same you could earn about $701 in interest in one year. See how we got this number below.
Series I savings bonds are government-backed securities that are connected to the inflation rate. Because the government backs it, it is considered a relatively safe, conservative investment with no chance of losing its principal value.
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.
I bonds cannot be cashed for one year after purchase. If a bond is cashed in year two through five after purchase, the prior three months of interest are forfeited. There is no interest penalty for cashing in the bonds after five years.
Con #1: I bonds don't always pay generously
But during periods when inflation is low, I bonds may not be your best wealth-building tool. So if you buy those bonds now, you might enjoy a nice amount of interest in the near term -- but that could change over time, leaving you stuck collecting less interest.
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.
I Bonds earn tax-deferred interest, while TIPS in a taxable account get hit by current taxes on both the coupon rate and the inflation adjustments in any year, even though the inflation accruals aren't paid out until the TIPS matures or is sold.
November 28, 2022. Much as I love I Bonds, the government's inflation-adjusted savings bonds, Treasury Inflation-Protected Securities (TIPS), may be a better option today. They are providing an even better yield over inflation than I Bonds.
The “I” stands for inflation. The interest rate on I Bonds is directly correlated with inflation. If inflation is high, the interest rate is high. If inflation is low, the rate is low.
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.
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).
The composite rate for I bonds issued from November 2022 through April 2023 is 6.89%.
$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.
Series I savings bonds — commonly known as I-bonds — currently offer an interest rate of 6.89%. While that's lower than the 9.62% they offered during the six months that ended November 1, it's still an attractive rate for savers who would otherwise be putting money into a savings account or CD.
People who were able to purchase I bonds before Oct. 28, 2022 will get the 9.62% rate on those I bonds until April 2023. The lag in interest rates lets you earn money for six months on an inflation rate from several months ago.
A survivor is named on the bond(s)
If you are the named co-owner or beneficiary who inherits the bond, you have different options for paper EE or I bonds and paper HH bonds. If only one person is named on the bond and that person has died, the bond belongs to that person's estate.
When we compare the historical 6-month composite rates against 12-month Treasuries at the time we see that the 6-month I bond rate is an average of 0.31% lower. At an initial rate of 6.89%, buying an I bond in October gets roughly 2.1% more compared to the 4.76% 12-month treasury rate (December 13, 2022).
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.
A given Social Security Number or Employer Identification Number can buy up to these amounts in savings bonds each calendar year: $10,000 in electronic EE bonds. $10,000 in electronic I bonds. $5,000 in paper I bonds that you can buy when you file federal tax forms.
Backed by the U.S. government, I bonds don't lose value and earn monthly interest with two parts: a fixed rate and a variable rate. The fixed rate may change every six months for new purchases but stays the same after buying, and the variable rate shifts every six months based on inflation.
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. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.