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With inflation at record highs and interest rates at record lows, investors are looking for safe investments with high returns. Traditionally safer investments, like CDs and corporate bonds, have such low yields, that they can be negligible at best. That has led to many investors to look at alternatives, such as I-bonds.
These circumstances have led to I-bonds getting a lot of attention on social media and in the news. Despite the uptick in news and coverage, many are still unaware of what I-bonds are and are left wondering if they should be investing in them. So, in this article, we will be breaking down what I-bonds are and whether or not they are right for your portfolio.
What Are I-Bonds
I-Bonds are US government bonds designed to protect your cash against inflation. The interest rates on these bonds are regularly adjusted to match the rate inflation per the Federal Reserve. Usually this isn’t very attractive to most investors, with inflation, and therefore interest rates, typically being around 2-4% per year. But, with a current interest rate of 7.12% (as of April 2022), suddenly I-bonds have investors talking.
Benefits and Downsides of I Bonds
One of the biggest draws of I-bonds is that the interest that you earn is completely exempt from all state and local income taxes. Plus, if you use the interest from your I-Bond to pay qualified educational expenses, they are exempt from federal income taxes as well.
Also, as with all US government issued debt, I-Bonds are guaranteed. This means that there is no risk when investing in I-Bonds. The US government has never defaulted on their debt and has a perfect credit rating.
But, if you are investing in I-bonds, make sure that you have a long time horizon as all I-Bonds have a maturity of 30 years. At minimum, you have to hold the I-bond for 5 years to receive all interest due and you can not cash out your I-bond until you have held it for at least 1 year.
There is also a maximum amount of I-bonds that you can buy per year. Each year, you can only purchase $10,000 in I-bonds per year. However, you can use $5,000 of your tax return to buy more I-bonds, bringing the maximum up to $15,000.
Should you be investing in I-bonds?
The answer to that question heavily depends on your personal goals and risk tolerance. If you are looking for a safe investment that may yield more than traditional bonds, then I-bonds are for you.
Also, if you live in a high tax state and are concerned about taxes on your investments, I-bonds are definitely worth your consideration.
On the other hand, if you are willing to take on some risk to potentially yield a higher return, you should most likely invest in a different asset class than government debt, such as stocks.
Also, if you have a shorter time horizon on your investments than the 5 year minimum, then you should not be investing in I-bonds.
Conclusion
I-bonds can be a great addition to your portfolio. The current high yields, the potential tax savings, and the absence of risk make them attractive to almost every investor. But, they are still not for everyone.
While this was a quick explanation of I-bonds, it is not everything that you need to make an informed investment decision on I-bonds or any other asset class. For more information, we recommend the following articles from Next Advisor and Forbes for more information and in-depth analysis.