I know there are lots of smart money people on CC (I am not one of them, LOL). Is there any good reason not to buy an IBond with money that is just sitting earning next to nothing in a savings account? I will need to access the money in just over 2 years when D24 heads to college, so I understand I will forfeit 3 months of interest, but other than that…? I want to make sure I’m not misunderstanding something.
Well, you cannot sell the bond before 12 months so be sure you won’t need it for a year. And you’re limited to buying 10K of Series I bonds per year per person.
Treasury Direct service is the worst. Only a government agency could be allowed to exist run this way.
The process of opening an account is a PITA. It’s easy to fill out but if the Feds can’t “verify” you (given the info they ask for when you set it up one would think this is impossible, btw) they lock your account until that process is complete. You then have to submit Form 5444. I’m going through this now. Upon submission, the email I received back says to allow up to 8 weeks to process. My account is still locked although the money from my bank was withdrawn for the purchases.
On the surface it does looks like it is a nice site for scheduling purchases and laddering t-bills/t-notes.
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The web site is a little cumbersome, but my son, brother and I all did it without a hitch. If you pull before 5 years you’ll forfeit 3 months of interest. Hard to beat the rate they’re paying.
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Did you set up the C 0f I? I think that may be why I got locked.
unless inflation runs hotter and increases faster, as your rates are locked 6 months at a time based on prior rate of inflation.
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Nope. I just bought directly from my savings account.
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What’s better right now that’s guaranteed with very little risk?
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Since none of us can predict the future, I’m sticking with the claim that a nearly risk free guaranteed rate of over 9% is hard to beat. If inflation rises, it will adjust upward. I just wish I could have invested more than $20K.
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Not necessarily better overall, but TIPS offer better inflation protection, the ability to sell any time, and allow you to invest much more than $20k. However, you’ll be subject to market volatility in both interest rate and inflation rate if you need to sell early. I-Bond also has interest rate risk as any other fixed income investment, but neither I-Bond nor TIPS has any credit risk since Uncle Sam can always print more money to pay you back.
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I don’t think it’s going to happen any time soon because inflation is so high, but TIPS can dip below zero, where as iBonds can’t. I don’t know the formula for either, but TIPS are oddly low right now. Each has its merits, but for the OPs stated purpose iBonds are a good option. As for risk, and why I say minimal and not zero, is that Uncle Sam doesn’t have a guaranteed life span.
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If you expect inflation to stay high, then TIPS are no more risky than I-Bonds. They’re both still subject to interest rate risk if you need the money, even though I-Bond provides a floor. When rates rise, all fixed income securities lose value, whether you redeem them or not.
I wouldn’t argue with any of that, but that’s not what the OP asked about. They asked if iBonds were a good option for the immediate 2 years. I think the answer is a clear yes.
We opened a TreasuryDirect account and bought iBonds this year because the current rate is so high. It went smoothly for us to set up the account and buy bonds although occasionally people have problems.
TIPS are an alternative for investing more money but have some differences from iBonds:
- iBonds have a 1-year lockup before you can sell, TIPS can be sold anytime on the secondary market
- If interest rates rise TIPS bonds will decline in value but an iBond never will decline when redeemed from the Treasury
- TIPS can be bought from the Treasury when issued, or for almost any duration you want on the secondary market in any amount you desire
- when held in a taxable account you can defer the gains (adjustment to match inflation and interest) until you sell. With TIPS you pay income tax yearly on the gains even though the gain in principal is not paid out until bond maturity.
- the gains on an iBond may be tax-free if sold the year you pay for education expenses. Gains on TIPS are gains.
We’ve used TIPS to inflation-proof some money previously held in bond funds with money we won’t touch until some years in the future; we plan to hold them until maturity so no risk of loss if interest rates go up over the next few years. IMHO holding individual bonds to maturity is much better than buying a TIPS bond fund. The current TIPS rates can be seen at TIPS
One way to buy $5K more per year (per family) of iBonds is to make sure you have a Fed tax refund due of at least that amount and then use your refund to buy iBonds. People can make estimated payments to do this.
A TreasuryDirect FAQ on iBonds is at I bonds — TreasuryDirect
Yes, DH and I each bought I-bonds in our own names. Then I read that you can also buy them in your trust. So we each did that also.
While the website was a bit clunky, I didn’t have any problems with either the personal or trust accounts.
That’s one of the saddest things I’ve read today.
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I am wanting to give money to D for Grandsons college. Would this be a better return than putting into a 529? Money won’t be used for 18 years.
Yes, the website is clunky, but once you are up and running, it’s not too bad. Plus, I’ve found that those that answer the TD customer support line are the most friendly and helpful government workers I’ve ever experienced. (btw: Make sure the account is listed in your will, since the Feds don’t do contingent beneficiaries.)
That said, the big issue to me is the $20k annual purchase limit. Sure, a fantastic deal at today’s rates, but will such a small amount move the investment needle, based on the total balances of your portfolio?
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General concepts applicable to all I Bonds whether purchased in an individual name, or under entity name (aka Trust), or as a gift.
AlI I Bond rates have two components, a fixed rate and inflation rate. The fixed rate is determined when purchased and stays same for as long as you hold I Bond. The current fixed rate is 0.00% The I Bond inflation rate varies. A new inflation rate is announced each May 1 and November 1 for all new I Bond purchases and any renewals. Yearly max purchase amount for all I Bonds is 10k. I Bonds automatically renew after every 6 months and will keep doing so until you withdraw the funds, or after 30 years.
As an example: if you purchase an I Bond sometime in May 2022, your will get the newly announced May 2022 rate for next 6 months (currently 9.60%). After 6 months or on Nov 1, 2022 you will get new inflation rate (TBD). But let say you purchased an I Bond in March 2022 (then rate was 7.12%). On Sept 1 2022, your I Bond will renew for 6 months and the reset rate of May 2022 (9.60%) will apply for next 6 months. After another six months, or on 3/1 of following year, the reset rate of previous November 2022 will apply for next 6 months, etc, etc…
You earn interest from the first day of month purchased. For example if an I bond was bought on October 15, interest would accrue from October 1. As I understand it if you buy I Bond on say May 31 and its a Saturday, the purchase would not be credited until next business day (June 1. Every six months from the bond’s issue (purchase) date, the interest earned in the six previous months is added to the bond’s principal value, creating a new principal value. Interest is then earned on the new principal. You do not get access to the interest payments until you cash out the bond.
You cannot withdraw funds in first 12 months after purchase. After 12 months, you can withdraw with penalty of 3 months of the latest earned interest. If held for 5 years, no penalty. If still holding after 5 years, you can keep holding and earn interest. I guess if inflation component stays high, you may want to consider holding bonds especially if you don’t need money. If inflation component drops to where say CDs are more attractive, maybe withdraw and put money into CDs.
Federal taxes are owed when you cash in, but I Bonds are exempt from state or local taxes. Instead of waiting for years to cash I Bonds and then pay taxes in lump sum, Treasury Direct posts yearly interest accrued and you can report interest yearly in order to spread out tax liability.
Other ways to buy I Bonds:
Entity acct: if you have say a Trust, you can title I Bonds in name of Trust (10k per year). This involves more paper work.
Gift I Bonds: Let’s say each spouse had purchased I Bond (10k) in their own name in 2022 and had maxed out for 2022. Say H buys a “gift” I Bond for his W (10k) in May 2022. This gift I Bond would sit in a Gift Box” found on H’s treasury acct. It’s like an Xmas gift waiting to be delivered to W. This gift I Bond would earn interest as any I Bond would. On January 1, 2023 H could “deliver” this gift I Bond to W. This gift I bond would be applied against W’s max 2023 purchase limit of 10k and W could not buy an I Bond in 2023 in her own name… H could even buy another gift in May 2022, put it in his gift box and deliever itn January 2024, all the time earning interest from date of purchase. W could also buy a gift I Bond for H in May 2022.
To buy or not to buy: If cash is not needed, don’t need interest paymnets every month, and think inflation will remain high for 2022, 2023, I Bonds may be attractive. For example let say you buy I Bond in May 2022 and receive 9.60% for next 6 months and in November reset rate drops to previous 6 month inflation rate (7.12%). You’d get 8.40% for year.
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This illustrates the interest rate risk. We probably all expect interest rates to go up, perhaps significantly. As rates rise, all previously issued fixed income securities (include I-Bonds) lose value (new issues will have higher coupons/interest rate even if inflation stays the same). I still own some older I-Bonds whose fixed component is 3% or more. In a higher interest rate environment, we can expect that fixed component of newer I-Bonds to rise from zero, causing the current issues to lose value in comparison.
Likely no, although there are no guarantees in life. If you buy iBonds now the current interest rate is 0%. So all the return for the bonds is simply to match inflation. Over periods such as 18 years the stock market has usually outperformed inflation. You can see one such chart at S&P 500: Total and Inflation-Adjusted Historical Returns
If you’re thinking of a 529 then you’ll want to look into pluses and minuses assuming you (the grandparent) own it. One such site is What to Know About 529 Accounts Owned by Grandparents & the New FAFSA
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