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Inflation Indexed Savings Bond

Table of Contents

What are Series I Savings Bonds?

  • A savings bond that earns interest based on combining a fixed rate and an inflation rate.
  • I Bonds are issued by the U.S. government and they can be purchased at TreasuryDirect.gov

How do I buy series I savings bonds?

  • I bonds are purchased through the U.S. treasury website
  • Cannot be purchased by a standard brokerage account

How much can I invest in series I savings bonds?

  • Limit of $10,000 per person or entity each year.
  • Additional $5,000 in I bonds if you use your tax return.
  • You can purchase them for your kids.

How is the yield determined?

  • Yield is determined every 6 months, compounded semiannually.
  • The actual interest rate is determined by a combination of fixed rate and the inflation rate
  • The combined rate can never be below 0%
  • The fixed rate of return, which remains the same throughout the life of the bond.
  • Inflation rate part of the rate changes every six months and is set twice a year (May and November)
  • The rate is based on the CPI-U for all items

Interest

  • Interest is added to the bond each month, then paid out when the bond reaches 30 years or you cash it out.
  • If you cash out before the 5-year holding period, you forfeit the previous 3 months of interest.

Taxes

  • Interest from Series I savings bonds are taxed at the federal level.
  • They are not taxable at the state and local levels.
  • You will receive a new document: 1099-INT (give it to your tax accountant)
  • You can elect to report interest each year OR report it once you cash the bond, give up ownership, or the bond matures.
  • The interest earned on Series I bonds can be used tax-free for college if the following conditions are met: The funds are used for qualified educational expenses for parent or dependent child.

Why Invest in Series I Savings Bonds?

I bonds are generally seen as mid to long-term investments with a reliable return.
Your money will be tied up in I bonds for at least 1 year, preferably for 5 years.

  • You can achieve better yields on your capital
  • There is better liquidity and lower risk than other alternatives

How can I put the I bonds into use

  • Park excess cash above the emergency fund
  • Diversifying fixed income force
  • They are not taxable at the state and local levels (Hello California and NY)

Risks and Downsides

  • TreasuryDirect website is tough to manage
  • Liquidity is a concern – Money is parked for 1 year
  • You forfeit 3 months of interest if you redeem before the 5-year mark
  • The $10,000 limit creates a ceiling on your return
  • To learn more about I bonds and determine if they’re good for your financial situation, go to treasurydirect.gov and/or work with your financial professional. 
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