With a volatile stock market, the Fed Funds rate near zero, and inflation the highest since 1982, some may seek an investment that can protect their purchasing power and limit their market exposure. 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 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.
Why do investors consider I Bonds?
Investors looking for diversification during market volatility and high inflation consider I bonds to help protect the purchasing power of their cash. I Bonds are issued by the U.S. Treasury, making them a higher-returning, lower-risk investment.
I bonds offer tax benefits since the interest payments are exempt from state and local taxes. If the I Bond is used to pay college tuition and fees at an eligible institution it is 100% tax-free. However, I Bonds are not exempt from Federal taxation.
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. Some features of I Bonds include:
- Exempt from State and local income tax
- Are an ‘electronic’ bond
- 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 April 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?
We can help you determine if investing in I Bonds is suitable for your situation and answer any questions you may have.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal.
Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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