There is a little-known Bond that is creating quite a stir in this inflationary, low interest rate environment; the Series I Savings Bond, commonly known as the I Bond.  

I Bonds are offered through the Treasury Department and are backed by the United States Government.  

What’s Unique about I Bonds

The unique thing about I Bonds is that the interest earned consists of a combination of a “Fixed-Rate” and an “Inflation Rate” together they create a “Composite Rate”-which is the actual rate of interest the I Bond will earn over a six-month period.

For example, the current Fixed Rate for a newly purchased I Bond is 0%, but the Inflation Rate for an I Bond purchased before May 1, 2022, is an annualized 7.12%, so this means the Composite Rate is also an annualized 7.12% for the first six months the I-Bond is held (after which a new Composite Rate will be determined by changes to the Fixed and inflation rates). 

I Bonds have a 30-year maturity but can redeemed after being held for at least 12 months.  If you redeem your bond between 12 months and 5 years you will forfeit the last 3 months of interest, but if you hold the bond for more than 5 years you can redeem it for its current value.

 How Much Interest Can You Earn?

Here’s an example of the interest you would earn if you purchased an I-Bond before May 2022 and hold it for at least a year.  Let’s say you buy a $10,000 I Bond. Over the next 6 months you will earn half of 7.12% (3.56%) = $356.00.  Even if at the next rate adjustment, the composite rate goes to zero, you will still earn 3.56%. So, the least you will earn is $356.00 after one year.  You would be hard pressed to find this good of an interest rate on a safe fixed income instrument anywhere else.

Sounds great right?  There is one caveat.  The government restricts I Bond purchases to $10,000 per person, per calendar year.  But here’s how you can maximize the purchase of I Bonds in your portfolio. 

How to Maximize I Bonds in your Portfolio

Because the annual limit is a calendar-year limit, you could purchase $10,000 worth of I Bonds before January 1, 2022, and then an additional $10,000 between January 1 and April 30, 2022. Which means a couple could purchase a combined $40,000 worth of I Bonds and receive the annualized 7.12% Composite Rate for the first six months the bond is held. In addition, I Bonds can also be purchased for children or by trusts and estates, which could further increase the amount purchased. Finally, paper I Bonds can be purchased using a tax refund up to a $5,000-per-return limit, which is in addition to the $10,000 annual limit on I Bonds purchased through the TreasuryDirect website.

 Time is of the Essence

There isn’t much time left to employ the above scenario and take advantage of the I Bonds very favorable Composite Rate of 7.12%.  In our low-interest rate, high inflation environment, I Bonds represent a rare potential opportunity to increase the yield on the fixed income portion of your portfolio.  I’ve purchased my I-bonds and if you would like to learn if I Bonds are right for you, feel free to contact me before 2021 is over![1]

[1] https://www.kitces.com/blog/federal-series-i-savings-bonds-inflation