Chris Pehlan, Wealth of Geeks
Good news, America: it just became easy to make a near-10% return on your next investment. As stock market volatility continues and inflation rages on through the spring, a lifeline is heading your way.
On May 2, the U.S. Department of the Treasury announced that all I bonds issued through October 2022 would carry a record-breaking variable interest rate of 9.62 percent, paving the way for people to stay ahead of current inflation rates.
According to a report from the New York Times, this new rate for I bonds — federal savings bonds indexed to inflation — is the highest since their inception in 1998. I bond rates are set via a fixed-rate (currently zero) and a variable rate (that can change twice a year and is based on the Consumer Price Index), combined into a composite rate.
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A measure of protection against inflation
The current U.S. annual inflation rating stands at 8.5%, according to a March 2022 report by the U.S. Department of Labor. As a result, prices everywhere are trending upwards, and there has been news that everything from the supply chain to the tourism industry will be affected in the coming months.
The good news is that the interest rate of these I bonds provides solace by helping to shield you from the negative financial effects of the current economy. Compared to interest rates of C.D.s offered by traditional U.S. banks maxing out at less than a tenth of a percent, now is the best time to invest in these bonds — and experts agree.
“As your cash continues to lose money in the bank as inflation continues to rise, and I bond protects your assets by adjusting for inflation,” says Danielle Miura, founder of Spark Financials.
“The unique quality of adjusting for inflation can be useful for those who want an investment with less risk but want returns higher than the average CD rate. If inflation continues to increase, the adjusted bond rate will have a sizable yield. Since I bonds are protected by the U.S. government, they pose less risk than other investments.”
An investment with a near-10% interest rate sounds like it would contain a certain amount of risk, but that isn’t the case with I bonds.
Instead, the worst-case scenario with holding these bonds is that you get your initial investment back when you cash out: according to the Department of the Treasury, this scenario happens when the composite rate of the I bond reaches zero. But while the rate may go to zero, the bond’s value cannot.
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A flexible, dynamic investment
Besides acting as a traditional investment, I bonds can be utilized in other financially-smart ways, such as being “a great supplement to an emergency fund,” according to Michael Reynolds, principal of Elevation Financial.
These bonds also have additional flexible uses that come with particular tax advantages: “I bonds are tax-free when used for qualifying education expenses. Additionally, they can be a supplement to retirement funds. And since taxes are deferred until they are redeemed, you can buy them now while you’re in a higher tax bracket but then redeem them when you’re in a lower tax bracket such as in retirement — or if you lose your job.”
Whether your goal is to supplement your emergency fund, use them towards a child’s education, or simply want to make a sensible investment, these high-yielding bonds stand out in a field of investment options.
However, if you’re seeing the 9.62% interest rate and are debating pulling all your assets and reinvesting them in these bonds, think again — there are some limitations:
• An individual may only purchase a maximum of $10,000 of I bonds per year
• The bonds must be held for one year before they can be redeemed
• If redeemed before five years, the owner forfeits the interest from the previous three months
• The $10,000 maximum is a soft maximum, with ways to circumvent the cap: an additional $5,000 in paper I bonds can be purchased by using your federal income tax refund, and couples who file a joint tax return can buy up to $25,000 per year.
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Ease of purchasing
If the thought of a 9.62% return on your $10,000 investment sounds good to you, the act of purchasing these bonds is an easy and straightforward process. They can be purchased electronically through the TreasuryDirect.gov website or by mail if you like traditional paper bonds.
As volatility continues shaking up the market and causing inflation rates to soar, it’s more important than ever to take advantage of smart investment opportunities when they’re available. If you have investment capital burning a proverbial hole in your pocket, maybe it’s all about taking advantage of an opportunity that hasn’t existed since these bonds were introduced over 20 years ago.
Darryl Lyons, CEO of PAX Financial Group, puts it all in perspective:
“Now is a fantastic time to buy I bonds. Too bad you can only invest $10,000.”
