How Investing In I Bonds Will Help You With Inflation

You don’t need me to explain the downside of inflation. Gas costs more. Food costs more. Just about everything costs more these days.

But I want you to know about how you can benefit from inflation.

I Bonds (the I stands for inflation) currently offer a very high yield that has virtually no risk.

Sounds good, right? Here’s what you need to know about I Bonds.

Investing in I Bonds

I Bonds are bonds sold by the U.S. government. The full formal name is Series I Savings Bonds.

There are two components to the interest rate you are paid. There is a base fixed rate. Right now, that rate is 0%. Yep, zero.

But here’s what you want to focus on: The second part of your interest rate is set every 6 months, and it is based on the current inflation rate. The new rate was set on May 1^st at 9.62%. That means anyone who owns an I Bond will earn 9.62% for six months, which works out to 4.81%. On November 1, the Treasury will reset the rate based on inflation at that point.

Even if inflation is lower in November 2022 (and then again when it is reset on May 1, 2023) I think it’s likely I Bonds will still offer a very competitive yield.

Keep in mind, that as I write this, bank savings accounts typically earn less than 1%. And even short-term bond funds have a current yield of 2.5% annually. Halve those yields and compare them to an I Bond interest rate, and I think you will see what a big advantage you have with I Bonds.

Now that you see why I think I Bonds are incredible, here’s how to decide if they are right for you.

• I Bonds are for investing not saving.

When you purchase I Bonds from the Treasury (details below on how to do this. It’s easy!) you can’t touch the money for the first 12 months. Period. So that means I Bonds are not a good investment for your emergency savings account where you need instant penalty-free access to your money.

• Withdrawals between years 2-5 years have a penalty fee of 3 months interest.

You are allowed to withdraw your money after the first year. But between the start of year two through year five, every withdrawal will be reduced by 3-months of interest, based on the current interest rate when you take out the money.

Starting in year six you can take out your money without any penalty fee.

• You will owe federal income tax when you make a withdrawal.

There is no tax bill while your money stays invested in I Bonds. When you make a withdrawal, you will owe federal income tax on the interest you earned. But you only owe federal tax. There is no state income tax on I Bonds.

• I Bonds are purchased directly from the U.S. government.

You can’t purchase I Bonds from your brokerage account. The only way to buy an I Bond is to set up an account at treasurydirect.gov, and then you will purchase I Bonds directly through that site. There are no fees to purchase I Bonds at treasurydirect.gov.

• The minimum investment is $25. The maximum is at least $10,000 per person, per calendar year.

The annual purchase limit is $10,000 per person. If you have a living revocable trust, you can also open an account in the name of the trust and save another $10,000 per calendar year. If you have a business, you can also have an account for the business that entitles you to an additional $10,000 per calendar year.

If you want to learn more about I Bonds, and why I think they are a great investment, you can hear it all from me directly, just click on this link to my Women & Money podcast and listen to the Suze School on Series I Bonds. 

You can also subscribe to the podcast for free through whatever podcast platform you use. Twice a week I discuss the smartest financial Do’s and Don’ts.