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.
Subscribe to LMC’s the Bottom Line monthly e-newsletter: