I Bonds, providing a safe space for cash, get a big rate hike

As the country recovers from the pandemic, rising prices have become a concern for many Americans. But inflation has also pushed up the rates on some government savings bonds, creating an opportunity for people looking for a safe haven for their money.

New Series I Savings Bonds, called Inflation Bonds or Bonds I, issued within the next six months will earn a rate of 7.12 percent, the Treasury Department announcement this week. This represents the second Initial rate never offered on bonds, the ministry said. The new inflation-based rate applies to I bonds issued from November of this year to next April, as well as older I bonds that still bear interest.

For comparison, the average rate for a one-year online certificate of deposit is less than 0.5%, according to financial site DepositAccounts.com.

“This is a very good deal,” said Stephen Biggs, chief investment officer at HC Financial Advisors in Lafayette, Calif., Of the current rate for I bonds.

Savings bonds are generally low-risk investments, but the rate structure of I-bonds is complicated and comes with drawbacks, such as limits on how much you can buy and penalties if you cash them in early.

“Although Series I bonds may seem very attractive at first glance, investors should carefully consider the complexities associated with cap on purchase amounts before making an investment,” said Kevin Shea, senior portfolio manager at Creative Planning. , a wealth management company in Overland. Park, Kan.

The rate obtained by inflationary bonds, which were first published in 1998, consists of two parts: a base rate, set for the life of the bond; and a rate that varies with inflation, as measured by the Consumer Price Index, which can be reset every six months, in May and November. The Treasury Department uses a formula to combine these two rates into a “composite” rate.

For over a year, the fixed rate on I bonds has been a disheartening zero. Yes, zilch. This means that all interest earned on these I bonds comes from their variable inflation rate. No one knows for sure whether the current episode of rapid inflation will be temporary or persist into the next year. But if the inflation rate on bonds were to fall, while the fixed rate remained at zero, the rate paid on bonds might be less attractive.

The composite rate on new bonds could even reach zero, although it is guaranteed to never drop below. So you’ll at least get back your original investment when you buy the bond back, according to the Treasury.

You won’t owe state or local income tax on the interest earned, but you will owe federal income tax, although you can wait to redeem the bonds to pay it off. (If you use the money for higher education, you may be able to avoid some or all of the federal taxes.)

Inflation bonds pay interest for 30 years, unless you redeem them earlier. You can trade Digital I Bonds online and have the money deposited into your bank account. If you still hold paper bonds, you can buy them back at local banks, depending on Direct cash.

Savers who bought I Bonds years ago when the fixed rate component was higher can now earn double-digit composite rates. Holders of bonds issued from May to October 2000, for example, will earn 10.85% because the last variable rate of inflation is added to the bond’s fixed rate of 3.6%, said Ken Tumin, founder of DepositAccounts. .com.

To see what your bond rate is paying, check on TreasuryDirect, the website operated by the Office of the Tax Service, which is part of the Treasury Department.

So how do you buy bonds? There are two ways. The first is to buy them from TreasuryDirect.gov. To do this, you must first create an online account with a minimum deposit of $ 25 and link it to your bank account. You will not receive a paper deposit; most new savings bonds are electronic and stay in your digital account.

You can buy up to $ 10,000 of Digital I Bonds per person per year.

The second way is to buy bonds I at tax time with your federal income tax refund. You can buy bonds up to $ 5,000 this way – the only way to get paper savings bonds.

A couple who files a joint tax return can purchase up to $ 25,000 per year – $ 10,000 each, plus an additional $ 5,000 at tax time. It is possible to buy more of them, by buying bonds I as a gift.

There are other caveats. You must hold the bond for at least 12 months before redeeming it. So if you are using the bonds for emergency funds, Mr Tumin said, you should have some extra money set aside elsewhere, in case you need it sooner. “It’s not an ideal emergency fund,” he said.

And keep in mind that if you redeem an I Bond within five years, you will have to pay a penalty equal to the interest for the previous three months.

The latest bout of inflation may be transient, so I Bonds should be considered along with other options to beat inflation over the long term, said Jacob Kuebler, senior financial advisor at Bluestem Financial Advisors in Champaign, Ill. . “Over a long period,” he said. says, “the stock market is a good hedge against inflation.”