Use I Bonds to Beat Inflation - 5 Helpful Things to Know About Protecting Your Investments

By Chika


Last Updated: May 16, 2022



Consumers have suffered as a result of rising inflation, with the rising cost of gas, groceries, and rent exacerbating financial hardship. The benefits of rising interest rates go to those who manage cash, not the investors who retain it.

Investing in I bonds could not have come at a better moment for investors with extra cash and a need for safety. Through October, these inflation-adjusted US savings bonds are paying a 9.62 percent annual interest.

According to records from the U.S. Treasury, Americans bought roughly $11 billion worth of these bonds, compared to approximately $1.2 billion in 2020 and 2021.

However, determining how, when, and how much of these bonds to purchase can be difficult. You don't want to be penalized for making an early withdrawal. This article outlines the essential ideas and how to get started with I bonds to help you disentangle the rules and tactics for making the most of them.



What is an I Bond? 

Inflation-linked savings bonds (I-bonds) are debt instruments issued by the United States government that are identical to conventional savings bonds, but include inflation protection. Series I Savings Bonds, originally issued in 1998, are meant to hedge against inflation.

The bond's return is made up of two parts: the fixed-rate and the inflation rate. The fixed rate stays the same for the life of the bond, but the inflation rate is adjusted every six months based on changes in the Consumer Price Index.

Both rates( fixed and inflation) rate are announced by the Treasury Department in May and November each year.

The bonds are sold for face value and pay the specified interest rate at maturity, which is normally 30 years after purchase. They must also be kept for at least five years to avoid a redemption penalty.

They are available directly from the US Treasury, much like ordinary savings bonds. Unlike Treasury Inflation-Protected Securities (TIPS), Series-I bonds are primarily issued to ordinary investors and are relatively low-risk investments.

There is no secondary market for these bonds, and they cannot be transferred. In other words, they must be redeemed by the original purchaser or the estate of that individual. They usually pay relatively low-interest rates compared to most other securities due to their low default risk.

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5 Helpful Things to Know About I Bonds

1. Where do I buy I Bonds?

To purchase electronic bonds, investors must first register an account on the TreasuryDirect website. They can also use their tax return to purchase paper bonds through an IRS program. If you have filed an extended tax return and have an overpayment, you can use the refund to buy them.


2. Pros of buying I Bonds

These bonds are 100% backed by the U.S. government, meaning they are relatively safe. Interests accrued on them are exempt from state and local income tax, and you can defer federal income tax until you cash them in (or until they mature in 30 years).

Because rates are inflation-adjusted, this means you retain the value of your money, if not higher. Series I-bonds also cannot lose value due to deflation or negative interest rates.


3. Shortcomings of I Bonds

You can buy them only from the U.S. government on the website. There is also an annual limit of $10,000 per person annually. 


4. When is interest paid?

When the bond is cashed, the interest is paid in one single payment. An I bond pays interest monthly beginning on the first day of the month following the issuance date. For example, if you buy a bond on May 20, you will get interest for the full month of May.

The interest is compounded twice a year and can be earned for up to 30 years or until the bond is cashed, whichever comes first.


5. How soon can one redeem I Bonds?

You can cash out these bonds after 12 months, but if you do so within the first five years, you will be charged a penalty equal to three months' interest. Interest is paid for up to 30 years. You can cash a minimum of $25 at a time and must leave at least $25 in your Treasury Direct account when doing partial redemptions.



Can you buy I Bonds for your kids?

Children under the age of 18 can possess them, but not Treasury Direct accounts. A parent may establish an account for their kid, which will be connected to the adult's account, allowing them to purchase electronic I bonds in the child's name.

These I bonds would be bought in the child's name and with his or her Social Security number. The receiver, not the giver, determines the yearly I bond purchase limitations. In a given year, the youngster might get up to $10,000 in electronic and $5,000 in paper I bonds.

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Key Takeaway

Inflation is reaching astronomic levels not seen in recent years. Given the present supply chain issues, coupled with rising commodity prices exacerbated by the war in Ukraine, there is little doubt that inflation would be more persistent than expected.

This has sent global markets into turmoil as investors are looking for haven to preserve their wealth. I bonds, with their inherent inflation adjusted rates are a viable source for investors hoping to put their money to work in an inflationary environment. 

Image by pictavio from Pixabay 


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