Over the last few months a few of my clients have asked about I Bonds. While this has only been a small number of clients, I know these have gotten some attention in the media and I thought there may be others who are curious and would appreciate a summary.
To start, outside of the last few months, no one has inquired about these in my nearly 30-year career. Perhaps a lack of inflation until now has had something to do with that. You see, the “I’ in I Bond stands for inflation.
Here is what I know:
I Bonds currently have an annualized composite interest rate of 9.62%; however, this interest rate adjusts every 6 months based on CPI (Consumer Price Index). The current interest rate is set to adjust in November and there is no guarantee it will stay at or near current levels come the November update. This composite interest rate consists of a constant rate (which is currently 0% for newly issued I Bonds) and a variable rate based on CPI. If inflation were to fall notably by November, the rate of recently issued I Bonds would also be expected to decline following the recalculation. Conversely, if inflation were to rise, the rate would increase.
I Bonds have a 30-year lifespan and there are constraints/penalties associated with early selling. These bonds do not have a secondary market and can only be redeemed through the US Treasury. They cannot be redeemed until you have held them for at least one year. Additionally if you redeem I Bonds before five years, you will surrender the last three months of interest as an early redemption penalty.
Purchases are restricted to only $10,000 in electronic bonds and $5,000 in paper bonds (paper I Bonds can only be purchased using a tax refund) per account holder per year.
Finally, if you would like to purchase these securities, you have to go directly through the US Treasury as these cannot be purchased anywhere else besides the Treasury. Treasury Direct website
While I Bonds may be a good option if you have extra cash beyond your emergency savings account, the drawbacks of small size, needing to open a special account for them and the one-year holding should be considered. In other words, there are pros and cons.
I hope this summary helps to better understand I Bonds. Please feel free to reach out with any questions.