How I Bonds Can Protect Your Money During Times of Inflation

Updated on: May 10, 2024

Authored by Greg Horning, CPA, PFS | Director, Co-Founder, SC&H Financial Advisors, Inc.

Inflation is up, the stock market is down, and as an investor, you may have heard of using I Bonds to protect your savings from inflation. In this article, we’ll go over what I Bonds are, why they are becoming popular, and how to determine if they will work for you.

What Are I Bonds?

I Bonds, also known as Series I savings bonds, are safe investments issued by the U.S. Treasury to protect your money from losing value due to inflation. I Bonds are considered one of the safest, lowest risk investments available, because they are backed by the full faith and credit of the U.S. government.

I Bonds earn interest based on changes in the Consumer Price Index for All Urban Consumers (CPI-U). An I Bond’s rate is a combination of a fixed rate and an inflation rate. I Bonds have a fixed interest rate throughout their lives, but the inflation rate is adjusted semi-annually.

The Bureau of the Fiscal Service announces its inflation rate twice a year, in May and November. Currently, the fixed rate of I Bonds is at zero percent, and the combined rate of I Bonds is 9.62% for bonds issued from May 2022 through October 2022.

Why Are We Talking About Them Now?

I Bonds have been around since 1998, but in the last four to five months, they have received a lot of notice. This results from the media attention given to the current rate of inflation and rising interest rates.

Interest rates haven’t risen in decades, and their current level is directly correlated to the increasing inflation and the Fed’s effort to combat the pressures caused by it. The current 9.62% interest rate that I Bonds is higher than you can get for a bond of similar quality and can protect your savings from losing value. Remember, however, that this interest rate will be adjusted every 6 months during your ownership of an I Bond.

Benefits of I Bonds

I Bonds have become popular in recent months because of the following benefits:

  • Purchasing power protection:
    • I Bonds can protect your cash from inflation since their interest rate is determined partially by the current inflation rate.
  • High interest rate:
    • Their interest rate is currently above what you might expect to achieve in terms of returns on high-quality, non-volatile investments in the near term.
  • Extremely safe:
    • Any security offered by the U.S. Treasury has almost zero risk of default.
  • Exempt from local and state taxes:
    • The interest is exempt from state and local taxation and can also be exempt from federal tax if you use them to pay for college tuition and fees at eligible institutions.

Things to Consider About I Bonds

Before you purchase I Bonds, here are some key considerations:

  1. You can only purchase a maximum of $15,000* worth of I Bonds each year.
  2. You must keep your I Bonds in a TreasuryDirect account.
  3. They are less liquid than some other investments.

You can’t cash your I Bonds out until you have held them for a full year. Cashing them out after the first year, but before five years, will result in the loss of three months of interest as a penalty. After five years, you can cash them out at full value. You also can’t be sure what rates will be in the future, so you can’t predict how I Bonds will perform in the long term.

How to Purchase I Bonds

There are two ways to purchase them, and in order to reach the maximum annual limit of $15,000 per person, you must use both methods.*

  1. The first way you can purchase I Bonds is by opening an account at TreasuryDirect and buying them in electronic form directly from the government. There, you can purchase up to $10,000 worth annually.
  2. You can also use up to $5,000 of your federal tax refund to purchase them in paper form.

You cannot resell I Bonds. You must cash them out with the U.S government.

Are I Bonds for You?

I Bonds are a way to diversify your portfolio, especially if you are looking for a way to invest a portion of your money outside of more volatile options and have cash in excess of what you need to live on for the next two years. But, like any investment, they should be one part of your overall investment plan.

I Bonds can help investors get a guaranteed return on their investment and protect their cash from inflation. If you purchase I Bonds, you should be comfortable with holding them for the next five years. You should also consult a financial advisor to determine what the appropriate allocation is between cash, short-term bonds, high-quality short-to-mid-term bonds, and stocks before making any decisions.

How SC&H Financial Advisors Can Help

You don’t have to determine whether I Bonds are right for you alone. Our team of advisors can help you navigate fitting I Bonds into your overall financial portfolio. If you’re ready to discuss further, contact SC&H Financial Advisors today.

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