Troy Sharpe: Can you really make 7.12% guaranteed
from a government-issued bond? Well, kind of. There's just some things you need to know.
Troy:
Hi, I'm Troy Sharpe CEO of Oak Harvest Financial Group, certified financial planner professional,
and also host the Retirement Income Show. I wanted to do this video to clear the air because we've
had clients ask us about these, we've seen comments on our videos asking about these,
and there's definitely some things you need to know. I want to go through the pros, the to cons,
how they work, and yes, you can actually right now currently kind of make 7.12%. As I said,
we'll go through what that kind of really means. If you want to make better decisions with money,
if you want to learn more about investing, taxes, all of these topics, hit that subscribe
button we're going to do just that for you. It takes a second and doesn't come you anything.
These are called I bonds. First and foremost, it's a 30-year bond, but you don't have to hold
it necessarily for 30 years. They pay a fixed rate and a variable rate. There are two components here
to this government-issued I bonds. The fixed-rate right now is 0%. That is a guarantee. It's not a
great guarantee, but it's guaranteed. The variable rate is 3.56% times two because
they pay semi-annually. The rate is set every May and November and it's based on inflation. In May,
they're going to issue a new variable rate for the next six-month period, and then in November,
they will issue another variable rate for the next six-month period based on inflation at that time.
As I said, it is a 30-year bond, but if you hold it for five years, you can sell it without any
penalty, meaning you don't lose any interest. Even though there's a five year period where
you have to hold this I bond without any penalty whatsoever, if you do need your money between
years, one and five, you can actually access it and get your money. You just lose three months
of interest. Not that big of a deal, especially if inflation stays high and we're making a good rate,
but during the first 12 months, there is no access. Obviously, this
is money you don't need for at least 12 months. Now, what are some of the positives here? First,
obviously, it's a pretty good inflation hedge. Inflation is high currently, and I Bonds do offer
you an opportunity to have safe money-earning a pretty good interest rate. Two, it is federally
exempt from state and local taxes, the interest on these bonds. If you're in a high tax city or
a high tax state, this interest is not subject to state and local taxes. Then finally, for federal
income tax purposes, you can use the interest without paying taxes if you use it for qualified
educational expenses so a bonus there as well. Now for the downsides, if inflation goes down,
your return goes down, we do not expect this inflation that we're currently going through
to last three, four, five, six years. I got a comment recently that said, "Troy, I'm just
going to invest in I Bonds. It's 7.12%. My money will double in 10 years." Well, it's very unlikely
that we'll have this type of inflation for the next 10 years. When you put your money into these,
it is a longer-term investment at least 12 months, but probably two, three, four,
five years. If inflation goes down, so will your return. The next downside is there is a $10,000
per person limitation of how much you can invest in these I bonds. If you're single
10,000 grand is all you can put in. If you're married, husband and wife
could put in 10 and 10, so $20,000. Now, you can use your tax refund to buy an additional
$5,000 worth of I Bonds, but you have to buy the paper bonds. Where do you buy
treasury bonds? You can't buy them from us. You have to actually go directly to the government.
You do that by going to treasurydirect.gov. Essentially, I just Google treasury direct. This
is pretty straightforward. It shows up here, you have the series I savings bonds. You click that.
You buy your electronic I bonds right here, again, 10,000 per person.
If you have a refund, you can buy paper I bonds with tax refund up to another $5,000 there.
If you have the money sitting in cash, not doing anything, you're looking for somewhere secure,
not a bad option, just understand the limitations and that your interest rate
could go down and likely will go down sometime over the next few years, but better than sitting
in cash. In summary, I bonds are issued from the government. They are 100% secure. They have two
components. One is a 0% current fixed interest rate. The other is a variable interest rate,
which is set semi-annually in May and November. There's a $10,000 per person limitation on these
bonds and if you have a tax refund, you can buy a paper I bond for an additional $5,000.
The interest on these I bonds is exempt from state and local taxes and could be exempt
from federal taxes if you use it for qualified higher education expenses. There are absolutely
no withdrawals within the first 12 months. If you withdraw your money between years one and five,
you have a three-month interest penalty. After year five, they are 100% liquid with no penalty
whatsoever. They are 30-year bonds though. These can be a good inflation hedge when
we're in an environment like this where inflation is increasing, but remember that if inflation
starts to go down, your rates on your I Bonds will decrease as well. When you hit that subscribe
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