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@$$4$Gold, commodities, Treasury inflation-protected securities (TIPS) or maybe bitcoin come to mind when thinking of inflation hedges. While all tend to work to some extent, each has its own quirks, and none cleanly moves in lockstep with inflation [but have you ever thought of investing in Series I savings bonds, or I bonds?
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- I bonds are issued and backed by the full faith and credit of the U.S. government and pay an interest rate directly tied to inflation. In short, as prices rise, so does the interest earned…
- The fixed rate is set at issuance and persists for the life of the bond.
- The…[inflation rate] resets semi-annually based on the non-seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) for all items, including food and energy.
- The inflation rate and the fixed rate, adjusted for inflation, are combined to get the overall interest rate.
- I bonds accrue interest monthly until they reach their 30-year maturity or you cash them, whichever comes first.
- For the current period running from November 2021 to April 2022 (rates will reset again in May), the fixed rate is 0.00% and semiannual inflation rate is 3.56%…[so, right now, they are paying a] composite rate of 7.12%.
- I bonds are tax efficient.
- You can defer tax reporting on interest until the bonds are redeemed, expire or some other taxable disposition.
- Interest is subject to federal income tax, but not state or local taxes…
- I bonds must be held for at least 12 months before redeeming it.
- After the first year an investor can redeem their bond, but redemption before five years have elapsed will result in a penalty worth the interest of the previous three months…
- I bond purchases are limited to $10,000 per person per year and are only available through TreasuryDirect.gov.
- You can buy up to $5,000 additional bonds using your federal income tax return for a total annual purchase amount of $15,000.
Conclusion
Amid volatile markets and escalating inflation, I bonds can help investors achieve a higher yield with the safety of a bond backed by the U.S. government…but it’s important to remember the money invested is tied up for the first year…
The above version of the original article by Adam Grealish (kiplinger.com) was edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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