By Taylor Maks, CFP® and Wealth Advisor
I bonds are a type of U.S. Savings bond designed to protect the value of your cash from inflation. Today’s I bond yields are far greater than any other government guaranteed interest rate available. They are issued by the U.S. Treasury and guaranteed by the US government.
How do I Bonds work?
Individual investors can purchase up to $10,000 of I bonds annually. I bond interest is calculated using composite rates based on a fixed interest rate and an inflation-adjusted rate. The fixed portion remains through the life I bond, while the inflation-adjusted rate is adjusted every six months. I bonds are compounded semi-annually. Interest is accrued and you access the interest earned when you cash out the bond.
How long do you have to hold I Bonds?
I bonds have a minimum 12 month holding period. If you redeem I bonds before the 5-year anniversary of the purchase date, you forfeit the last 3 months of interest. If you hold for more than 5 years, there is no 3-month interest forfeiture.
How are they taxed?
I bonds are exempt from state and municipal income taxes, but are subject to federal income tax. They are federally exempt if used for qualified higher education expenses.
How to purchase I Bonds
I bonds can be purchased online through Treasury Direct. (: https://www.treasurydirect.gov/indiv/myaccount/myaccount_treasurydirect.htm) Treasury Direct is a website run by the Bureau of the Fiscal Service under the US Department of Treasury. You will need to open up an account, if you do not already have one, and purchase through this system.
Example:
| Single | Married | |
| Purchase Amount | $10,000.00 | $20,000.00 |
| First 6 months | 3.56% | 3.56% |
| Interest in first 6 months | $356.00 | $712.00 |
| Interest next 6 months (using 3-year semi-annual average) | $165.18 | $330.36 |
| Loss of last 3 months’ interest | ($82.59) | ($165.18) |
| Estimated annual interest | $438.59 | $877.18 |
| Estimated annual interest rate in Year 1 | 4.39% | 4.39% |
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete.
