I Bonds are Hot - Are They Right for You?
With inflation rising rapidly, I Bonds are all the rage. Should you invest in I Bonds?
Let's start with the basics:
Series I Savings Bonds are a savings bond that earns interest based on combining a fixed rate and an inflation rate. The rate of return consists of a combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year. For bonds issued from May 2022 through October 2022, the combined rate is 9.62%.
I Bonds are subject to federal income tax but because they are issued by the federal government, they are state income tax-exempt. If you purchase them through the Treasury Direct website, the minimum purchase is $25 and the maximum purchase per calendar year is $10,000. The limit is applied per Social Security Number (SSN) or Taxpayer Identification Number (TIN). For paper Series I Savings Bonds purchased through IRS tax refunds, the purchase limit is $5,000 per SSN. I Bonds earn interest for 30 years unless you redeem them first. You can cash them in after one year. But if you cash them in before five years, you lose the previous three months of interest. (For example, if you cash an I Bond after 18 months, you get the first 15 months of interest.)
As you can see, during periods of high inflation, I Bonds are an attractive fixed income investment. The main drawback is the $10,000 limit per SSN or TIN per calendar year.