Hello Again - Last week we talked about brokered CDs, today I will talk about I bonds. I get a lot of questions about these. I bonds stand for Inflation Bonds because that’s what they are designed to do…..protect an investor from inflation. But there are some unique features to be aware of. It’s not a simple bond. It has cert characteristics.
So, how do they work? I bonds have 2 rates that make up the total return. The first rate is the fixed rate. It does not change once you buy the bond. Right now the fixed rate is zero.
The second rate is the inflation rate. This rate changes every 6 months based on the previous 12 month rate of inflation. The Treasury determines the new inflation rate every May 1st and October 31st (Next Monday). On May 1st this year they measured annual inflation at 9.62%. Then they cut that in half to get 4.81%. That’s what investors received on their money during the current 6 month period. Next Monday they will establish the new inflation rate. They will cut that in half, and that’s what investors will get for the next 6 months. It’s really as simple as that. If inflation rises, your 6 month inflation rate goes up, if it declines, then your rate goes down.
Here are some other conditions:
These must be purchased online by you at www.treasurydirect.gov
You will need some basic info when you go to their site to get started, such as SS#, Address, Email Address, Checking or saving acct info.
The max you can invest each year is $10,000 per person per year in electronic bonds. Your interest compounds every 6 months when the new rate is set.
You can cash them in after 12 months, but if you hold it less than 5 years, you will lose 3 months interest.
You can hold them up to 30 years
You will have to pay Federal income tax on the earnings, but No State income tax. You can defer the taxes until you redeem them if you choose, or pay them annually.
In my view, they are a nice way to invest $10k or less per year in a conservative manner and just let the account grow. When inflation roars, you will get a nice rate, when it doesn’t you probably won’t. At 2% annual inflation, the 6 month rate is 1%.
Call or email me if you have questions.
Best Regards,
Mike