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.
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.
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.
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.
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.
Call risk is the likelihood that a bond's term will be cut short by the issuer if interest rates fall. Default risk is the chance that the issuer will be unable to meet its financial obligations. Inflation risk is the possibility that inflation will erode the value of a fixed-price bond issue.
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.
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.
The composite rate for I bonds issued from November 2022 through April 2023 is 6.89%.
I bonds can be excellent options for retirees to build up the conservative bucket of their retirement income plan. As low-risk investments, they are a way for risk-averse investors to beat inflation without putting more resources into the stock market.
Right now, I bonds will deliver a 9.62% annualized interest rate, which means that they'll get you higher returns than other traditional savings methods, like savings accounts. The attractive yield has spurred Americans to open more than 1.5 million accounts since last November.
$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 main way is to go online using TreasuryDirect.gov, and the I bonds bought through this website are digital. There's also an entirely separate way to purchase paper I bonds.
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.
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.
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).
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.
U.S. Treasury bonds are generally more stable than stocks in the short term, but this lower risk typically translates to lower returns, as noted above. Treasury securities, such as government bonds and bills, are virtually risk-free, as these instruments are backed by the U.S. government.
Bonds are safer for a reason⎯ you can expect a lower return on your investment. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment.
2022 Annual Purchase Limits
As of October 2022, each individual entity can purchase up to $10,000 worth of Series I bonds in a year. All bonds must be registered electronically through TreasuryDirect.
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.
November 1, 2022. Effective today, Series EE savings bonds issued November 2022 through April 2023 will earn an annual fixed rate of 2.10% and Series I savings bonds will earn a composite rate of 6.89%, a portion of which is indexed to inflation every six months.
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.
Generally speaking, if you want to earn more interest, you'll need to take on more risk — and for many retirees, that's not a good option, either. You can safely earn far more with I Bonds, a type of savings bond issued by the U.S. Treasury, and protect against future high inflation.