I Bonds – A high return and safe investment hiding in plain sight

Looking for an investment that aims to keep pace with inflation? I bonds might be for you. They are sold exclusively by the U.S. government through the www.TreasuryDirect.gov website.

Investors in these inflation-protected U.S. savings bonds are guaranteed to recover their principal plus inflation over a maximum of 30 years. I bonds offer a fixed rate, plus an inflation rate that adjusts semiannually. The inflation rate is linked to the Labor Department’s CPI-U, a measure of urban inflation. I bonds allow you to defer federal taxes until the bonds are redeemed, at which point you will receive a 1099. Additionally, I bonds are exempt from state and local taxes. There is also an interest rate floor of 0.0%, meaning your principal is protected in the unlikely event of deflation.

Today, the yield on a regular U.S. 30-year Treasury bond is about 2.25%. I bonds now offer an initial annualized yield of 7.12% (this is made up of a fixed rate at 0% and the semiannual inflation adjustment of 7.12%). At this rate, investors are keeping pace with the most recent inflation reading of 7.5% over the last 12 months. Meanwhile, yields on conventional Treasury bonds are now negative when inflation is taken into account. This demonstrates an advantage of I bonds.

A downside to I bonds is that each individual investor can purchase a maximum of $10,000 per year and would need to establish an account via the Treasury Direct website. If you opt to receive your Federal tax refund in I bonds, you could add an additional $5,000 annually. Holders of I bonds are barred from cashing them in for the first 12 months and you will lose three months’ of interest if the bonds are redeemed within the first five years. Lastly, the annualized inflation rate is variable, resetting every 6 months (keep in mind that the Federal Reserve’s stated goal seeks to achieve inflation that averages 2 percent over time).

While Conrad Siegel cannot purchase I bonds for our clients, I bonds could be an attractive alternative to low yielding bank savings account balances that are embarked for longer-term retirement or education funding goals. If you would like to learn more, reach out to our team.

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