Should You Consider Investing in I Bonds?

By Ephraim Fishman, CPA

If you are like most people, the recent market turmoil has you concerned about where to invest your money. The stock market in tanking, bonds have lost on average 8% of their value, gold is down 4% and let’s not even get started on what has happened recently to the cryptocurrency market. However, there is one often overlooked, yet undervalued investment – Inflation protected U.S. Savings Bonds or I Bonds.

I Bonds are offering 9.62% annual yield through the end of October 2022. Where else can you find an investment where you can earn almost 10% and the security is backed by the U.S. government that almost guarantees you won’t lose money? The yield changes every 6 months to keep pace with inflation as measured by the Consumer Price Index. The income earned from I Bonds is exempt from state and local income taxes. In addition, you can defer federal tax on the earnings from I Bonds until you redeem them, or to when they mature in 30 years, whichever comes first.

What’s the downside?

Wealthier investors might not find investing in I Bonds worthwhile since I Bonds were designed for small savers – you can’t buy more than $10,000 in I Bonds per account per year. However, you can make gifts of up to $10,000 in I Bonds per year for multiple recipients, and you can also buy an additional $10,000 in I Bonds annually in a trust account or in an account for a corporation, partnership or business that you own or manage, as long as each has its own account and tax identification number.

Detractors of I Bonds complain that since the income is pegged to inflation, its hard to get motivated to invest in something that is guaranteed to return 0% after inflation. However, stocks may beat inflation in the long run, but in the short run, they are losing significant value. It might not be a bad thing to invest in a vehicle that keeps pace with inflation even if the I Bonds don’t outperform the rising cost of living. Remember, investing is not only about capital appreciation, its also about capital preservation.

Other issues to deal with when purchasing I Bonds:

• You must hold the I Bonds for a minimum of one year, except if you can prove hardship.
• If you redeem the I Bonds within five years, you forfeit three months interest.
• I Bonds are not available in tax sheltered vehicles such as IRA’s or 401(k)s.
• Your broker or financial adviser can’t purchase I Bonds for you – you must navigate an antiquated TreasuryDirect website to purchase I Bonds.

We are undergoing a period of economic uncertainty, where inflation is the highest it’s been in 40 years, we are experiencing a bear market and investors are looking for someplace safe to invest their money. You might want to consider investing in I Bonds. Should you have any questions or need assistance in how to go about purchasing I Bonds, feel free to reach out to your LMC professional.

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