I-Bonds: What Investors Need to Know

I Bonds: What Investors Need to Know

Investors looking for diversification during market volatility and high inflation often ask their financial professionals about strategies that may be appropriate for their situation. With the Fed Funds rate near zero, and inflation the highest since 1982, A-Series I Bonds have received a lot of attention lately from investors. A-Series I Bonds are appropriately named since the ‘I’ stands for inflation and are a strategy that investors use during a low-rate, high-inflation period as a low-risk investment to achieve a positive return.

I Bond features

I Bonds are designed as low-risk investments that are not bought or sold in the secondary market and can be purchased electronically through Treasury Direct, the U.S. Treasury’s online platform. I Bonds are issued by the U.S. Treasury, making them a higher-returning, lower-risk investment. Here are other features of I Bonds for investors to consider:

  • I Bonds combine a one-year fixed rate with a variable inflation rate to give investors a return plus protect their purchasing power during inflationary periods.
  • If the I Bond is used to pay college tuition and fees at an eligible institution, it is 100% tax-free.
  • Exempt from State and local income tax
  • I Bonds are not exempt from Federal taxation.
  • Are an ‘electronic’ bond
  • It can be purchased as paper certificates only when filing your taxes with a minimum of $50.
  • Investors can purchase up to $10,000 worth of I Bonds through Treasury Direct per year and $5000 worth of I Bonds through their tax return, bringing the purchase to $15,000 per year.
  • Earn a fixed interest rate for the life of the bond and a variable rate that is adjusted for inflation each May and November.
  • Have a 20-year initial maturity with a 10-year extended period for a 30-year maturity.
  • Must be held for one year, and if redeemed before five years from purchase, the previous three months of interest is forfeited.

How the I Bond Rate calculates

The fixed-rate and variable rates are expressed as the composite rate. For example, I Bonds purchased between now and the end of July 2022 may yield over 7% on U.S. Treasury I Bonds for a year.

The combined I Bond rate will never be less than zero, but the combined rate can be lower than the fixed rate. If the inflation rate is negative (deflation), it can offset the fixed rate. The variable rate is based on the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-UC) for all items, including food and energy.

Questions about I bonds?

Although you can’t purchase I Bonds through your financial professional, they can answer your questions and help you understand how I Bonds may be a part of your investing strategy.

*Advisory services offered through Trajan Wealth, L.L.C., an SEC registered investment advisor.

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