What is the downside of Treasury I bonds?
Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
Further, I-bonds must be held for at least a year, so you won't be able to cash them out before a year is up if the rate plunges due to falling inflation. In fact, you'll lose the last three months of interest if you redeem them before five years are up.
You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline. Question: What is the inflation rate? November 1 of each year. For example, the earnings rate announced on May 1 reflects an inflation rate from the previous October through March.
It can go up or down. I bonds protect you from inflation because when inflation increases, the combined rate increases. Because inflation can go up or down, we can have deflation (the opposite of inflation). Deflation can bring the combined rate down below the fixed rate (as long as the fixed rate itself is not zero).
Because I bonds are fully backed by the U.S. government, they are considered a relatively safe investment. Only individuals and certain entities can buy I bonds. You can buy $10,000 per year in electronic I bonds and an additional $5,000 per year in paper I bonds, which must be purchased with your federal tax refund.
Another advantage is that TIPS make regular, semiannual interest payments, whereas I Bond investors only receive their accrued income when they sell. That makes TIPS preferable to I Bonds for those seeking current income.
If you're investing for the long term, a U.S. savings bond is a good choice. The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases. If you're saving for the short term, a CD offers greater flexibility than a savings bond.
The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
Even if the stock market crashes, you aren't likely to see your bond investments take large hits. However, businesses that have been hard hit by the crash may have a difficult time repaying their bonds.
What is the next I bond rate in 2024?
That rate is currently set at 3.94%, annualized, for six months. It will adjust again on May 1, 2024, rolling into effect for all I Bonds, no matter when they were purchased. The current composite rate is 5.27% annualized for six months for purchases through April 2024.
The March 2024 I Bond inflation rate is 3.94%
The November 2023 – April 2024 I Bond inflation rate is announced at 3.94%* based on the September 2023 CPI-U data. This rate is over . 5% higher than the prior rate. This inflation rate will be applied to your individual I Bond on its own 6-month cycle.
Yes, 5.27% is the current inflation interest rate if you purchase the I Bonds before May 1, 2024. The previous I Bonds interest rate was 4.30% for April 2023 to November 2023.
Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest. Only taxable accounts are allowed to invest in I bonds (i.e., no IRAs or 401(k) plans).
Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.
Both share similar tax considerations, providing federal tax deferral and state and local tax exemption. The fundamental difference between them is the variable inflation interest rate offered by I bonds and the guaranteed 20 year doubling for EE bonds.
EE Bond and I Bond Differences
The interest rate on EE bonds is fixed for at least the first 20 years, while I bonds offer rates that are adjusted twice a year to protect from inflation. EE bonds offer a guaranteed return that doubles your investment if held for 20 years. There is no guaranteed return with I bonds.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
I bonds can be a safe immediate-term savings vehicle, especially in inflationary times. I bonds offer benefits such as the security of being backed by the full faith and credit of the U.S. government, state and local tax-exemptions and federal tax exemptions when used to fund educational expenses.
- Short-term certificates of deposit. ...
- Series I savings bonds. ...
- Treasury bills, notes, bonds and TIPS. ...
- Corporate bonds. ...
- Dividend-paying stocks. ...
- Preferred stocks. ...
- Money market accounts. ...
- Fixed annuities.
Are I bonds better than a savings account?
Reasons I bonds could be a better choice
Series I Savings Bonds, or I bonds, are specifically designed to protect your money from the effects of inflation. Savings accounts are not -- they simply pay interest based on prevailing rates. And these rates can be very different.
Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
If a financial institution pays the bond, you get a 1099-INT from that financial institution either soon after you cash your bond or by January 31 of the following year. If your bonds are in your TreasuryDirect account, your 1099-INT is available in your account by January 31 of the following year.
If you invest in TreasuryDirect, your 1099 will be available electronically and you can print the form from your account. 1099 forms are available by January 31 of each tax year.
No, the interest income earned from I bonds is not considered a capital gain and is therefore taxed differently. Instead, it is taxed as regular income at the federal level and exempt from state and local taxes.
