What Are I Bonds?

The fear of inflation and its impact on the financial markets has been in the headlines throughout 2022. Although the Federal Reserve has made several efforts to reduce inflation (including adjusting interest rates), many investors feel it’s a pressing concern. This is especially true for those who are set to retire in the near future, or have already made their transition to retirement and are drawing down their portfolio. 

One way investors are seeking to insulate themselves against inflation is through the use of I Bonds. Of course, I Bonds aren’t the best available solution for everyone. It’s important to know your options and speak with a financial advisor to create your unique strategy as you head into retirement. Today we’re going to look at I Bonds from an educational perspective, and how they’re being used by investors in today’s market.

What Are I Bonds?

I Bonds are U.S. Savings Bonds that have regularly adjusted interest rates. This helps those who purchase I Bonds to protect the value of their cash investment and, ultimately, keep pace with inflation in the near term. 

Investors can purchase up to $10,000 of I Bonds per year, and can use up to $5,000 from their tax refund (if they have one) to purchase additional I Bonds. 

Those who purchase I Bonds should note that:

1. I Bonds have a 30-year maturity cycle – 20 years of “original maturity” and another 10 of “extended maturity”.
2. I Bonds cannot be cashed within one year of purchase.
3. There isn’t an interest penalty if an investor cashes their I Bonds within 5 years of purchase.

How Are I Bonds Used, And Why Are They Popular Right Now?

I Bonds have what’s called a “composite” interest rate. This interest rate is comprised of their fixed rate and the variable rate that is adjusted regularly over time. Currently, I Bonds have a composite interest rate of 9.62%. Interest earned on I Bonds over time is subject to federal income tax, but not state or local income tax. 

Because they have a composite interest rate that takes inflation into account, I Bonds are often viewed by investors as being “safer” than other low-risk investments. Investors may purchase up to their annual limit as a way to invest in low-risk funds that keep pace with inflation. 

Need Help Inflation-Proofing Your Strategy?

Although I Bonds may be right for many investors looking to offset the impact of inflation in their portfolio, purchasing them may not be right for you. Working in tandem with a fee-only financial advisor is critical to help you determine what investment options best fit your unique needs and goals. Learn more about how you can partner with Wood Smith Advisors to create a unique investing plan for your family by getting in touch with us today! 

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education, and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.