An I Bond Primer

We’ve been getting a lot of questions about I-Bonds lately, and today on MoneyWise, we’ll explain what they are and how you can benefit from them. There’s no question that I-Bonds became hugely popular in 2022. If every cloud has a silver lining, then the silver lining in the cloud of inflation is the I Bond, because the I stands for inflation, and its interest rate is pegged to the Consumer Price Index. This past year, inflation skyrocketed and so did the interest rate paid by I-Bonds. That interest rate is recalculated every six months, so for a good part of 2022, I-Bonds were paying an incredible 9.62% interest. Now, they tell us that inflation has come down somewhat, so the latest six-month period of November through April of 2023 has I-Bonds paying less, but still a very healthy 6.89%. That’s way more than you can get with any bank savings account. ARE I-BONDS SECURE? And I-Bonds come with as much security as you can get in this world. Issued by the Treasury Department, they’re backed by the full faith and credit of the U.S. government. They’re also exempt from state and local income taxes, which makes them an even better investment if you live in a state or city with high-income taxes. When inflation hammers the stock and bond markets, you’d think that investors would move all of their money into I-Bonds. But you can’t. You can only buy up to $10,000 worth of I bonds a year through the government’s TreasuryDirect website and another $5,000 a year with your tax refund for a total of 15,000 per person. WHO CAN BUY THEM? You’d also think that investors around the world would flock to I-Bonds, but they can’t. To purchase them you need to be: a U.S. citizen, a U.S. resident, or a civilian employee of the U.S. government, regardless of where you live. Some trusts and estates can also purchase I-Bonds, but corporations can’t. HOW I-BOND INTEREST RATES ARE CALCULATED Let’s drill down a little deeper into how the interest rate of I-Bonds is calculated. The rate you’re paid is called the composite rate. That’s a combination of the current fixed rate of .40% plus the current inflation rate of 6.48%. Put em together and you get the current composite rate of 6.89%. Your I-Bond earns interest on a monthly basis, and that interest is added to the principal of your bond every six months, allowing your money to compound over time. However, you don’t actually get access to those interest payments until you cash in the bond. ACCESS TO YOUR FUNDS Also and this is why you wouldn’t include I-Bonds in your emergency fund you can’t cash them in for a full year after purchase. And if you cash them in from 1 to 5 years of purchase, you’ll lose the prior 3 months' worth of interest. After 5 years, there’s no penalty for cashing them in. WHAT ABOUT MATURITY? I-Bonds have a 20-year original maturity period and an extended period of another 10 years for a total of 30. After 30 years, your I Bond has earned you all the interest it can, and there’s no reason to hold it any longer. HOW ARE I-BONDS TAXED? While I-Bonds are exempt from state and municipal income taxes, they are not exempt from federal taxes with one exception. If you cash in a bond to pay for qualified higher education expenses, the interest you’ve earned may be exempt from federal taxes. One more important thing to know about I-Bonds and taxes: The owner of the bond always has to pay the tax. That means if someone else bought the bond and gave it to you as a gift, you pay the tax on it when you cash it in. BOTTOM LINE So to recap, I-bonds have three major benefits. First, they’re designed to protect your money from the ravages of inflation. It’s almost a given that money held in a bank savings account will lose some purchasing power. Not so with I-bonds. When inflation goes up, so does the interest paid on an I-Bond. Second, and certainly unlike the stock market, I-Bonds have as close to zero risk of default as you can get since they’re backed by the federal government. And finally, they’re exempt from state and local income taxes and possibly federal income taxes if you use them to pay for college tuition and fees at a qualified institution. All of this means you should consider I-Bonds as part of your overall financial planning. On today’s program, Rob also answers listener questions: ● What is the best way for a parent to give home equity to adult children as an inheritance? ● What are your options for leaving an inheritance to a charity? ● When does it make sense to pay off your home early? RESOURCES MENTIONED: ● Find a Certified Kingdom Advisor ● NCFgiving.org Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to [email protected]. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app. To support this ministry financially, visit: https://www.oneplace.com/donate/1085/29