Key points
- I bonds are low-risk investments that can help hedge against inflation.
- Interest rates on I bonds are adjusted every six months.
- Backed by the U.S. government, I bonds are considered a safe way to invest.
Intro
I bonds have been in the spotlight in recent years. Thanks to rising inflation, their interest rates are now competitive with other savings products, such as CDs and savings accounts.
Current interest rates won’t last forever. But many investors are buying I bonds while rates are high. You may be wondering whether you should buy I bonds and if they have downsides.
Fortunately, I bonds are considered safe investments. But they might not be right for everyone.
What are I bonds?
An I bond is a savings bond issued by the U.S. Treasury. It’s designed to protect investors from inflation. The composite interest rate on an I bond usually changes every six months based on changes in the consumer price index. These adjustments ensure the bond’s value keeps pace with rising prices.
I bonds issued from May 1, 2024, to Oct. 31, 2024, have a composite rate of 4.28%. That includes a 1.30% fixed rate and a 1.48% inflation rate. Because the U.S. government backs I bonds, they’re considered relatively safe investments.
Are I bonds a good investment?
I bonds are generally safe investments. So they can be good options for people who prefer lower-risk portfolios, said Micheal Collins, founder and CEO at WinCap Financial.
I bonds are backed by the full faith and credit of the U.S. government. That means they don’t have the same kind of volatility as other investments, Collins said. Plus, they perform well during periods of high inflation.
Only individuals and certain entities can buy I bonds. You can buy $10,000 in electronic I bonds and an additional $5,000 in paper I bonds annually. Paper I bonds must be purchased with your federal tax refund. They are relatively affordable, with electronic I bonds starting at $25 and paper I bonds starting at $50.
Can you lose money on I bonds?
The answer to this question is yes and no, according to Stuart D. Boxenbaum, chief financial planner and investment retirement advisor at Statewide Financial Group.
“With I bonds, your principal is protected and safe. However, if you cash the bond out before five years, then you will lose up to the last three months of accrued interest. So you can’t lose what you put in, but you can lose earned interest,” Boxenbaum said.
Should you put emergency funds into an I bond?
I bonds are great, safe investments. But they’re paid out at the end of their 30-year maturities. Yes, you can cash them in after 12 months. If you redeem an I bond within five years of purchase, however, you forfeit the last three months’ interest.
While you can purchase I bonds directly from the Treasury online, you can’t buy or sell them in the secondary securities market. That makes them difficult to offload in an emergency if you need your money quickly.
Most people buy I bonds online. But if you buy a paper bond, remember that you can’t simply ask a broker to unload it. Paper bonds can be cashed only by sending them to the Treasury or finding a bank that accepts them.
Should you move your 401(k) or retirement money into I bonds?
You can’t purchase I bonds within retirement accounts like 401(k)s or individual retirement accounts. That’s because these accounts already have tax advantages.
Since there are no payouts until the bond matures or is sold, you won’t owe taxes until then. When you cash out, you’ll owe federal taxes but no state or local taxes.
“It can be OK to move some of your 401(k) or retirement money into I bonds, with the emphasis being to add flexibility to your retirement strategy,” Boxenbaum said.
When do I bond rates change?
The interest on I bonds is a combination of:
- A fixed rate.
- An inflation rate.
The fixed rate is announced on May 1 and Nov. 1. It applies to I bonds issued for the next six months. The inflation rate usually changes every six months. It’s also set on May 1 and Nov. 1. These rates combine to determine the composite rate at which an I bond earns interest over six months. The current composite rate for I bonds is 4.28%. It’ll be adjusted next on Nov. 1, 2024.
I bond returns vs. the stock market
Stocks may offer higher returns over the long term. But they also come with greater risks due to market volatility. I bonds are safe and predictable investment options. They also offer a guaranteed return that keeps up with inflation.
Deciding between I bonds and stocks is subjective. It depends on your individual financial goals, risk tolerance and investment horizon. During times of high inflation, I bonds can be particularly attractive due to their potential to provide impressive returns.
How long does it take for I bonds to mature?
I bonds take 30 years to mature. If you’re still holding the I bond 30 years from its purchase date, you can redeem it to collect the interest and face value.
Note: The face value refers to the bond’s value once it matures.
Is it easy to cash in your I bonds?
You must hold I bonds for at least 12 months before redeeming them.
Electronic I bonds can easily be bought and sold using the TreasuryDirect online portal. Log in and use the link for cashing in securities in ManageDirect. You can cash a minimum of $25 in penny increments. If you cash only a portion of an I bond’s value, you must leave at least $25 in your TreasuryDirect account.
You can’t cash part of a paper I bond. A paper I bond must be cashed for its entire value. You have two options for cashing paper I bonds:
- Ask a bank. Find out the bank’s dollar limit on redemptions and what identification and other documents you need. Note that some banks do not cash savings bonds.
- Send your bonds to Treasury Retail Securities Services, along with FS Form 1522. You don’t need to sign the bonds. You’ll have to validate your identity. FS Form 1522 explains how to do that and includes the address.
Overall, I bonds are safe investment options if you want to protect yourself from inflation and earn a decent return. They may not offer the high returns of riskier investments like stocks. But they provide a low-risk alternative that can provide a guaranteed return and help hedge against inflation.
Frequently asked questions (FAQs)
I bonds can be useful additions to an investment portfolio as low-risk assets that provide guaranteed returns and help hedge against inflation. Their interest rates are adjusted based on changes in the CPI.
Consider your financial goals and risk tolerance when deciding whether I bonds fit into your investment strategy.
I bonds can be a safe investment option. But there are a few potential downsides. For instance, I bonds have a lower maximum investment limit than investments like stocks. And the interest earned on I bonds is subject to federal income tax. It can be deferred until the bonds are redeemed, though.
I bonds also have a one-year holding period before they can be redeemed. And there is a penalty for redeeming them before you’ve held them for five years. Assessing your financial situation before making an investment decision is crucial.
If inflation goes down, you should expect to see the composite rate for I bonds go down too. But even in periods of deflation, the redemption value of your bonds won’t decline.
You must pay federal income tax on any interest your I bonds earn. But they are exempt from state and local income taxes. If you use money from bonds for qualified higher education expenses, you may be able to avoid federal taxes as well.
