Financial Figures

Ever heard of I bonds?

“I bonds” are backed by the U.S. federal government. While they’re not FDIC insured, they’re just about as safe. When you consider the FDIC board is comprised of presidential appointees, even money you have insured by that entity probably isn’t going to be very safe if our government crashes and burns.

Avoiding net losses on investments

Right now, I bonds are paying 9.62%. This rate is guaranteed for six months after purchase, up through October of this year. Then the rate changes again. That’s not a bad return considering most CDs are now paying less than 2%. It gives you a slight edge on inflation too, which was 8.6% in May. If you’re not making at least the rate of inflation with your investments, you’re logging a net loss over time.

How I bonds work

There are limitations on this investment. You can only purchase $10,000 a year worth of I bonds. You can cash out as soon as one year after purchase, but money needs to stay in the account for five years to be removed penalty free. This tool is a lot more forgiving than most other options for early withdrawals. The cost is three months interest. So, if you keep your I bonds for two years, you’ll only get interest for 21 of those months. Penalties don’t touch your principle.

You’ll owe federal income tax on your returns, but not state or local taxes. That is, unless you invest the money for the specific use of funding higher education. There are rules for this (see: www.treasurydirect.gov/indiv/planning/plan_ education.htm).

Interest is compounded, and recalculated, semi-annually. You lock into the current rate for six months when you purchase the bonds. There’s a guaranteed fixed payout percentage, with the balance based on inflation and CPI (Consumer Price Index). All money in the account, including interest and principle, comes to you when you cash out the bond. You can earn interest on this investment for up to 30 years.

The Treasury Direct site even has an interest rate calculator so you can see how your money might grow.

People are scared about the volatility in the market right now. I get that. It’s a bigger concern for Baby Boomers than Generation Z. If you’re looking at moving money to CDs or other low performing safer investments, know you may be protecting principal, but you’re losing money. It makes sense to try to find investments that are at least keeping pace with the inflation rate. I bonds can do that.

FINANCIAL FIGURES

By Michael Shelton

Executive Summary:

There’s a little-known savings vehicle called the I bond. These were actually introduced in 1998. Recent historic lows in interest rates have brought them back into favor.

Michael Shelton is a financial retirement counselor. Reach him at Michael@360Wealth Consulting.com