What are i bonds and should you invest in them?
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What are i bonds and should you invest in them?
Starting this month, series i savings bonds, which are considered inflation-proof and have a maturity of 30 years, are paying a record 9.62% interest rate.
“i bonds are specifically designed to be a hedge against inflation,” Marketplace contributor Chris Farrell once told a listener. “Every dollar you invest will be worth a dollar plus some interest in the future when the bonds are cashed in.”
Farrell outlined some of the advantages of savings bonds: there are no credit risks, they can be tax-deferred until you cash them out, nor do you have to pay state or local government taxes once you do cash them out (bonds are subject to federal income tax).
Not a bad time to hedge — the U.S. economy is experiencing the highest rate of inflation in about 40 years, with consumer prices jumping 8.5% in March. If you buy i bonds before November 2022, the historic 9.62% interest rate is guaranteed to apply to the first six months of ownership.
An individual can buy up to $10,000 worth of electronic i bonds through TreasuryDirect each calendar year ($20,000 per married couple), and redeem them after 12 months. Using your federal income tax refund, you can buy an extra $5,000 in paper i bonds.
Return on i bonds is based on both a fixed rate, which remains the same rate you bought it at throughout its 30-year lifespan, and a variable rate, which is based on the Consumer Price Index.
The variable rate is set in May and November each year and applies “to your bond every six months from the bond’s issue date.”
That 9.62% rate is the overall rate for i bonds. While they can be cashed after 12 months, TreasuryDirect warns that the last three months of interest will be lost if i bonds are sold before they’re five years old.
According to Beaverton, Oregon-based financial planner Dave Erlandson, i bonds, because of their risk-free nature, are a good choice for people starting to invest.
When it comes to investing, you generally have to be careful with the term “guaranteed,” Erlandson noted. With government bonds, it’s different; they are in fact backed by the full faith and credit of the U.S. government.
They may not be the best short-term investment, Erlandson acknowledged — inflation may go back down, investors cannot cash out for a year and they face that five-year penalty if they cash out early. “Really, all of your investments should be thoughtful and long term,” he said.
As a long-term investment, though, Erlandson’s in favor.
“Everybody needs to have a positive experience,” he said. “That’s important in times like these: to help people stay invested, to help people have confidence.”
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