CWG Insight Series: What’s An I Bond?
What are I bonds? This is becoming a common question from our clients, and we wanted to provide additional details as this may be a good fit for cash on the sidelines.
I bonds are a type of U.S. savings bond designed to protect the value of your cash from inflation. They have nearly zero risk of default, are exempt from state and local taxes, and may be federal tax free if used to pay eligible college tuition and fees.
Investors can buy up to $10,000 worth of I bonds annually through the government’s TreasuryDirect website. You can purchase another $5,000 with your tax refund, upping the annual total purchase amount of series I bonds to $15,000 per person.
I bonds pay a composite interest rate consisting of two parts:
- A fixed rate, set at time of purchase, that lasts the full 30 years
- An inflation rate that changes every 6 months, normally May 1 and November 1
That combined rate is applied to the 6 months after the purchase is made. For example, if you buy an I bond on July 1, 2022, the current 9.62% rate would be applied through December 31, 2022.
Interest is earned on the bond every month. The interest is compounded semiannually: twice a year, the interest the bond earned in the previous six months is added to the bond's principal value; then, interest for the next six months is calculated using this adjusted principal.
The duration of an I bond investment is 30 years. They cannot be cashed for one year after purchase. If a bond is cashed in year two through five after purchase, the prior three months of interest are forfeited. There is no interest penalty for cashing in the bonds after five years.
You might look at this as a replacement for your cash safety net that is currently in a high yield savings account, but I will caution you on doing that. Your safety net is always accessible, and always there in case of an emergency. You cannot cash an I bond out for a full year, so if you had an emergency during that first year, you would not have access to your cash.
This could, however, be a good place for excess cash not needed for emergencies or your longer-term goals with stock and bond market-based portfolios.
If you have excess cash and want to explore this as an option for you, please reach out to your Personal CFO and they’ll be happy to discuss.
Nick Kolbenschlag
Chief Executive Office & Co-Founder