Series I savings bonds received a lot of attention in 2022, and for good reason. At one point that year they offered a yield of 9.62%. Quite impressive for a guaranteed investment! Unlike Treasury Bonds that carry a risk of loss if you do not hold them until maturity, you cannot lose money on I Bonds. The current interest rate on I Bonds is 4.28% and this is set to adjust at the end of October. So, should you buy before the interest rate goes down?
Pros:
- Semiannual interest is added to the principal value of the bond, compounding over the life of the bond. This differs from Treasury notes and bonds, which make cash interest payments. This is a favorable feature because it eliminates risk on the reinvestment of interest.
- Another appealing feature of I bonds is that holders can defer paying taxes on the interest income until they redeem the bonds. This gives I bonds an IRA-like quality.
- Interest earned on I Bonds is exempt from state and local taxes.
- The yield can never decline below zero.
Here are some of the cons:
- The variable component of the interest rate on I Bonds is pegged to inflation. At one point during 2015 inflation was so low that newly issued I Bonds paid 0.00%. The advantage of buying I Bonds today is that they have a fixed rate of 1.30%, meaning they will never yield less than that.
- Consider the concept of financial “clutter.” Most of us already have our money spread across multiple institutions, including accounts for checking, savings, investment (IRA, Roth IRA, 401k, taxable, etc.), 529 college savings, Health Savings Accounts (HSAs), etc. I Bonds must be held in a TreasuryDirect account and cannot be consolidated with your other investments. Do you want one more financial account that you need to monitor to make sure it is a prudent investment (especially if the rate drops to 0%)? Does it unnecessarily complicate your estate planning?
- You are limited to only purchasing $10,000 per Social Security Number per year, plus up to $5,000 in paper bonds purchased with a tax refund. This limits how much one can benefit from them and requires a consistent dedicated effort over time to build up a sizable allocation to I Bonds.
- I Bonds are not marketable and cannot be sold on secondary security markets.
- You cannot redeem I Bonds during the first 12 months. Furthermore, if redeemed within the first 5 years there is a three-month interest penalty.
It’s important to note that I Bonds only keep up with inflation, providing preservation of capital and the potential for some yield. While they can be a component of a diversified portfolio, they are not a replacement for a long-term investment strategy.
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