I Bonds: What You Need to Know to Earn Nearly 10% on (Some) of Your Money

I Bonds, issued by the Federal Government, have become very popular this year (2022) as inflation is top of mind (and financial news) for most people.

Nearly $11 billion worth of these bonds has been purchased over just the past 6-months, compared with about $1.2 billion during the same period last year. And for good reason, as these bonds are currently paying a 9.62% annual rate of interest. But understanding how, when, where, and how much of these bonds you can/should purchase can get tricky and you don’t want to face any withdrawal penalties.

To help understand some of the rules and strategies for making the most of I Bonds, here are some answers to questions we frequently get at Baobab Wealth…

What exactly are I Bonds?

The ‘I’ in I Bonds stands for ‘Inflation’. These bonds are issued by the Federal Government and are a way for you to lend money to the government. The interest that the bonds pay is linked to the inflation rate in America. You can lend the money to the government for between one and thirty years with I Bonds.

How do I Bonds work?

The bonds have an interest component built into them that adjusts every 6 months depending on what the inflation (CPI) reading is in the United States. Currently, because inflation is running hot, the interest is set to an annualized rate of 9.62%. This can (and will) change every 6-month, either up or down, depending on if inflation is getting higher or lower.

You are limited to purchasing a maximum of $10,000 worth of I Bonds, electronically, directly from the government, per person in your household each year. As a parent, you can also purchase up to $10k worth of I Bonds for each child in your household as well.

How long do I have to keep the I Bonds?

You have to hold an I Bond for at least 12 months before they are eligible to be redeemed. But, if you redeem them between 1 year and before you have held the bond for 5 years, there is an early withdrawal penalty equal to 3-month’s worth of interest. The bonds will keep earning interest for up to 30 years and all the interest is paid in a lump sum when the bond is cashed. The interest you earn from I Bonds is also taxable.

I Bonds earn interest starting from the first day of the month that they are purchased, so if you purchase an I Bond on June 25th for example, you would start earning interest on your money from June 1st and would get interest for the entire month.

Can I buy I Bonds in my IRA or Roth IRA?

No, unfortunately, you are not able to purchase I bonds within any qualified accounts or workplace retirement accounts.

Can I buy I Bonds through Baobab Wealth?

No, I Bonds can only be purchased directly from the government and cannot be bought (or sold) through advisors (like myself), banks, or other financial institutions.

Can I buy I Bonds as a gift for someone else?

Yes, you can purchase I bonds as a gift for someone else and hold it in the ‘Gift Box’ section of your Treasury Direct account until you are ready to transfer it to the recipient. The bonds must be held in your account (in the Gift Box) for a minimum of 5 days before they are eligible to be delivered to the recipient. The recipient must establish a Treasury Direct account (or already have one) in order to receive the bond and you must be able to provide the recipient’s Social Security number as well.

Should I purchase I Bonds?

At Baobab Wealth, we are currently recommending I Bonds to clients with liquid non-qualified money that is in a bank account (savings or CD’s) and that they wish to invest for between one and five years. Some of our clients are putting a (small) portion of their ‘emergency fund’ money into I-bonds in order to earn a more attractive interest rate than currently available at banks and understand that any money invested into I-bonds will not be liquid for 12 months.

Where do I buy I Bonds?

You purchase I Bonds directly from the government by creating an account at www.TreasuryDirect.gov.  Here you can learn more about I Bonds and how they work as well.

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