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With inflation at a 40-year high of 7% and the average bank savings paying 0.06% (according to Bankrate.com), savers have a hard time keeping up these days. If only there was a place where you could park some cash, know that your money was safe, and earn at least enough interest to keep up with inflation.
Introducing … the I-bond. In case you haven’t heard of them, I-bonds are government securities backed by the full faith and credit of the Federal Government. The interest payments are a combination of a fixed rate, guaranteed for the life of the bond, and a variable interest rate pegged to inflation.
Before you get too excited, the fixed rate is actually 0% right now. However, with the high inflation rate, the current yield on I-bonds comes in at just over 7.1%. Compared to the 0.06% of the average bank savings rate, that’s huge. To put it in context, if you have $10,000 in a savings account at a bank, you are lucky to earn $6 in interest over the course of a year. That same $10,000 in an I-bond would earn $712 at today’s rates.
What’s the catch? I-bonds are guaranteed by the government and the current annualized interest rate is 7.12%, but there are some limitations. For example…
- You are limited to purchasing $10,000 of I-bonds in one calendar year in an electronic format. You may also buy paper bonds, up to $5,000 a year. In combination (electronic and paper) you can buy up to $15,000 of I-bonds in a calendar year.
- Interest is expressed as an annual number, but it gets recalculated twice per year. The current 7.12% is an annual figure, but if you buy an I-bond today you will earn interest of 0.59% per month only for the first six months you own the bond. In other words, if you buy an I-bond today, your actual return may be more or less than 7.12% over the next 12 months. (You can learn more about how rates are calculated here.) Even still, you will earn 10x as much interest in one month in an I bond as you would in a typical bank savings account for the entire year!
- I-bonds are purchased directly from the government. You can not buy them through a broker or agent. This isn’t really a limitation, just something to be aware of. You can get more information on buying I-bonds at TreasuryDirect.gov.
- I-bonds must be held for one year or longer. If you sell them after one year but before 5 years, you will forfeit 3 months of interest. I-bonds pay interest for 30 years.
- Interest may be taxable. Generally, interest from I-bonds is taxable as ordinary income on your federal tax return, but not your state tax return. If you liquidate your bonds to pay for education related expenses, the interest may be tax free, if your income is below certain amounts. Currently the income phase out is from $83,200 to $98,200 for single filers; and $124,800 to $154,800 for married filers. (Download IRS Form 8815 to calculate the exclusion of interest on your EE and Series I bonds
The interest you earn from Series I bonds probably won’t change your life or make a meaningful impact on your retirement. However, given today’s inflation rates I-bonds may be appropriate for a portion of your short-term cash reserves.
To learn more about Series I bonds and other savings bonds, visit TreasuryDirect.gov.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.