With inflation numbers skyrocketing to 40-year highs, the ubiquitous I-Bond will reset its interest rate on May 1 to 9.62% for 6 months. Thus, on your $10,000 investment, you’d make a guaranteed (no principal risk) 4.31%. No state tax and ultra-low risk, this sounds good, right? Using some quick math, that works out to be about 116.5x better than the average money market rate according to the FDIC. To place this in a different frame, you’d need to invest about $120,000 to get the same yield in a money market under the current conditions.

What is an I-Bond? An I-Bond is a US Treasury Security that is geared to inflation. The Bond resets its interest rate to the current inflation rate every six months, specifically, at the beginning of May and the beginning of November. The Bond accrues interest at that rate for that six-month period and then is reset. The rate is a blend of a fixed rate (currently zero) and the inflation rate, which is CPI-U. With the March 2021 numbers, the next reset rate should be 9.32% for new bonds. Because the rate is blended, holders of older I-Bonds get a fixed rate plus the inflation rate. So, if you bought an I-Bond in September of 2000, your next reset would be 12.92% for the next six months (3.60% plus 9.32%). The I-Bond rate can never go below zero.

Is it Safe? I-Bonds are guaranteed for their principal value plus accrued interest by the full faith and credit of the U.S. Government. They are, in effect, a form of Savings Bond. They can be held for a period of up to 30 years.

Can I Cash Them In? You can cash in an I-Bond at any time after 12 months. However, you lose three months interest if you cash in an I-Bond within the first five years of holding.

How Much Can I Buy? You can buy up to $10,000 of I-Bonds per year per social security number. Thus, a married couple could register a bond under each spouse’s social security number, presumably with the other spouse as beneficiary. You can also buy bonds in the name of a trust or entity. Children under 18 can also have I-Bonds. Thus, families can buy up to $10,000 per social security number in the family per year.

How Do I Buy I-Bonds? You can buy electronic I-Bonds through Treasury Direct, which is relatively simple. You can also buy a paper I-Bond through your tax return using your refund. Buyers file an IRS Form 8888 to utilize their refund to buy the Bond. (Note: you will receive a paper bond.)

How Should I Title the Bond? I-Bonds can be titled individually, or with a beneficiary. If there is no named beneficiary, the I-Bonds will be included in the owner’s probate estate. Obviously, a beneficiary is preferred.

Tax Consequences? I-Bonds are subject to federal income tax when cashed in but are not subject to state income taxes. I-Bonds can be tax free under certain circumstances if used for education. File a Form 8815 to get the tax-free benefit.

Bottom Line. The boring, silly I-Bond is a fantastic tool for getting a safe, and now, high, rate of return. For $10,000 per person per year, the I-Bond is a safe, inflation-protected addition to a portfolio. Go to Treasury Direct or grab an I-Bond with your tax refund. You’ll make about 100 times more than your money market fund, at least for now, plus save taxes. As always, I will try to answer emailed questions at llabrecque@sequoia-financial.com.

The views expressed represent the opinion of Sequoia Financial Group. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Sequoia believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sequoia’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Past performance is not an indication of future results. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

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Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

I-Bonds: Tax-Efficient Interest With Minimal Risk | Sequoia Financial Group


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