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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

I Bonds – A Potentially Valuable Part of Your Investment Mix

Anyone who has been to the gas pump or grocery store lately is well aware that inflation has ramped up to near historic levels, leaving the real value of your dollars (and investments) lower and lower. This, and the resulting flight to cash that many investors have made due to fears of a possible recession-caused bear market for stocks, have many wondering what they can do to establish at least some modicum of a protective hedge around their purchasing power. 

Enter the lowly US Treasury issued Series I Savings Bond (I Bond for short) for consideration in the mix. I Bonds are inflation protected, nearly risk-free savings vehicles issued by the federal government that, due to the current high rate of inflation, are suddenly garnering more attention. 

This is especially so since Treasury recently announced that I Bonds issued in May would carry an initial annual interest rate of 9.62%, which is good through at least October, 2022.

I Bond interest rates are actually a combination of a fixed interest rate that stays the same for the entire 30-year life of the bond, and a variable rate which is tied to the Consumer Price Index for all Urban Consumers (CPI-U) and is adjusted every six months, in May and November. By tying the variable portion to the CPI-U, the idea is that the bond's earnings will keep pace with inflation.

I Bonds increase in value on the first day of each month, and interest is compounded semiannually based on each I Bond's issue date. Further, the interest rate can never go below zero and the redemption value can never go down.

Like other US Treasury securities, I Bonds come with a few tax benefits too. For one thing, the interest earned on such bonds is exempt from income tax in all states and localities that impose such a tax. They are not generally exempt from federal income tax, however, if used to pay for higher education, the income will be federally exempt as well.

The bonds are not without their drawbacks, however. For one thing, you are not allowed to redeem the bonds for at least one year, so you have at least that minimum commitment. Further, if you redeem them before the end of five years of ownership, there is an early redemption penalty equal to the most recent three months of interest earned. After five years though, no penalty.

There is also the investment risk that the interest rate could decline in the future while other forms of investments could be more profitable. Still, in current times, many investment advisors say they could be a valuable place to park some cash while waiting for things to settle down.

I Bonds can be purchased online via what is called TreasuryDirect (see in various denominations beginning at $50 with a maximum purchase of $10,000 per person, business, trust or estate. These are electronic bonds. Up to an additional $5,000 in paper bonds can be purchased using your federal tax refund, as well.

I Bonds can also be purchased and given as gifts to others.

So, have some money you don't need right now or desire to protect from the volatility of the stock market, as well as from inflation? I Bonds certainly are worthy of consideration and may just be right for you!

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