It is May 17, 2022, and the current market is down, down, down. This applies to both stocks and crypto. Putting money in the market can be scary for short-term holders (although it’s a sale for long-term holders!). Plus, buyers in the housing market are slowing down with interest rates at nearly 6%, double what it was for the past two years. Meanwhile, the inflation rate is up, with an April-to-April rate change of over 4%, which makes holding onto cash unideal. For those near retirement (5 years out or less) or those saving for shorter term goals and want their wealth to grow, there is a solution in I Bonds! I Bonds are low-risk, inflation-protected assets that are currently yielding a 9.6% annual return until October 2022. This makes I Bonds a great investment option right now. Here is what you need to know about I Bonds.
What You Need to Know About I Bonds
I Bonds are an inflation-protected asset. While inflation remains high, I Bonds will likely continue to see high interest rates. In November 2021, the I Bonds had a guaranteed 7% interest rate. Just this month, the interest rate bumped up to 9.6% and will remain at that rate until October 2022.
The I Bond interest rate is determined by a fixed rate and the inflation rate. Currently, the fixed rate is at 0%, and the inflation rate is at 4.3% for the next 6 months. This is how we get to 9.6% annual rate of return. The interest rate renews every 6 months. It will remain at 9.6% until October, when the rate will change. If inflation goes up, then the rate will go up, too.
I think everyone should be considering I Bonds right now. But before you buy, here are a few things to note.
Facts About I Bonds
- You can invest $10k per person/entity per calendar year into I Bonds. I have also heard that you can invest an additional $5k in paper bonds directly from your tax return.
- Per entity means if you own a business or a living trust, you can invest $10k in I Bonds on behalf of those entities as well.
- The interest rate is redetermined every 6 months.
- I bonds cannot be cashed for at least 12 months (1 year). Do not tie up money that you need in 6 months, for example. Do not tie up your emergency fund into an I Bond either. Look at it as a short-term investment. If you are looking to buy a house at a moment’s notice, I Bonds are not the option for you. However, if you wish to buy a house next year, then definitely consider it!
- The life of the investment is 30 years. But the money can be pulled out any time after 12 months.
- There are no penalties for pulling the money out before the 30 years are up if it has been in the I Bond for at least 5 years.
- If the money is pulled out between years 1 and 5, you lose the interest gained from the last three months. This doesn’t sound terrible to me. For example, I can buy $10k in I bonds right now with the plan to pull it out in a year. I will gain 6 months of interest at 9.6% and 3 months of interest at the percent determined in November 2022. I can still beat the current market.
- There is no state tax on I Bonds.
- There is a federal tax on the gains, but one way it can be federal tax exempt is if you use the money from your I Bond to pay off higher education costs from a list of approved institutions, including paying off your student loans! However, there are requirements. For example, you cannot file married filing separately. Income requirements also apply. Single tax filers must have an adjusted gross income less than $94,550. Married tax filers must have an adjusted gross income less than $149,300. I would definitely check out the rules on this page.
Who Could Benefit from I Bonds
I Bonds can be a useful tool for multiple financial situations. Whether you are a college graduate looking to pay off student debt, a high school graduate just starting college, parents who want to start a college fund, a young couple saving up for a home, an almost retiree looking to earn in your last five years of working, or a short-term investor unhappy with the current state of the market – all of these people may want to consider I Bonds.
Learn more about I Bonds at the Treasure Direct Website.
Trying to decide what to do with the rest of your cash? Why not consider a High Yield Savings Account? If you happen to choose to open a Marcus High Yield Savings Account using my referral link, you can receive an additional 0.20% Annual Percentage Yield (APY) on your Online Savings Accounts for 3 months. Learn more about HYSA in my post below.