Should I Buy an I Bond?
Last year, Jim Ludwick created a Money Tip on Buying an I Bond—the Series I Savings Bond. You can watch his recording here. At that time, the I bond was paying 7.12% which was phenomenal given the low interest rates at the time. Now, the rate is at 9.62%! If you haven’t purchased a I bond yet, this is a good time to consider if this makes sense for you.
Here are some of the I Bond features:
- The interest rate is linked to inflation and adjusts every 6 months.
- Purchasing is quick and easy on TreasuryDirect.gov.
- No risk to your principal. When you cash out your I Bond, you’ll always get back the original amount you put in.
- Must hold for a minimum of 1 year – you are unable to redeem the bond during this period, so best not to dip into your Emergency Fund to buy this in case you need the cash for an emergency!
- After the 1 year holding period but before 5 years, there is a withdraw penalty of 3 month’s worth of interest – after the 5-year holding period there is no penalty for withdrawal.
- There is a $10,000 limit on purchases per Social Security number. You can buy a smaller amount if you don’t have the spare funds for the full $10,000.
- An additional $5,000 can be purchased using your tax refund.
- They stop earning interest after 30 years. Definitely cash them out by then!
When determining if this makes sense for you, the first question is if you have the spare cash to buy it, knowing you aren’t going to touch it for 1 year. Next, if you need the cash flows from this investment, you won’t be getting the interest monthly. The interest accumulates and pays out when you sell. Also, the interest is taxable unless the I Bond proceeds are used for qualified higher education costs. Lastly, while the rate is great now, it may also drop lower, so this fantastic rate is not guaranteed. After you’ve passed the 1 year lock up period, if the rate drops lower than what you think you can make investing elsewhere, you can cash it out then.
The I Bond may not be a fit for everyone’s portfolio, but if you decide it’s right for you, this is a great opportunity to earn a high yield, at least for a period of time.
