what are I bonds how do i even invest in them and are high bonds a good investment
for the better part of the past 30 years the answer has been no but that may be changing
I bonds also called inflation-linked bonds are issued by the united states government and are
designed to protect the value of your cash from inflation how do they work well stick around and
i'll explain the ins and the outs of I bonds and whether they may deserve a place in your portfolio
hey there Colin Exelby certified financial planner here and i'm the owner of the virtual financial
advisory practice celestial wealth management i provide financial planning to business owners
and their families that just makes sense look you just can't escape the talk about inflation
every night when i turn on the news there is a story on inflation and how it is hurting the
pocketbooks of everyday americans it's almost comical how often inflation is mentioned on the
news now but it's true and it's on people's minds the annual rate of inflation in the united states
hits 6.2 percent in october 2021. this is the highest rate in more than 30 years as measured by
the consumer price index if you have money sitting in checking accounts savings accounts or even the
so-called high-yield savings accounts your money is probably earning you close to zero percent
and that's a steep price to pay for having access to cash and the fdic insurance that goes along
with traditional bank accounts if the cost of things you buy is increasing at six to ten percent
and your idle cash is earning zero percent you are guaranteed to lose six to ten percent let me
say that a different way inflation is the most devastating tax because you don't realize it's
happening you may have the same amount of money in your checking and savings accounts but it's buying
six to ten percent less what if i told you that there is a little-known u.s government-backed bond
that would pay you 7.12 percent annualized on your money but to maximize the strategy
you must take advantage of it by december 31st well it's true and it's called an I bond
investors are becoming more and more interested in stock and bond market alternatives that may be
higher returning lower risk investments and this bond has the potential to do just that
today's 7.12 annualized yield it's far higher than any other government guaranteed interest rate that
i've seen so what is an i-bond i-bonds come from the same family of bonds as the much more popular
but much lower-yielding series ee bonds i-bonds are a unique low risk investment issued by the u.s
treasury to protect your money from losing value due to inflation because i-bonds are issued by
the u.s government they have nearly zero risk of default making them a very safe investment
so how is the interest calculated i bond interest is calculated by combining a fixed interest rate
and an inflation adjusted rate and i'm going to discuss more on how that works in a moment
i-bonds earn the interest monthly but you don't get access to the interest payments until you
cash out the bond the interest payment is automatically added to the bond's value
twice a year this means that the principal can compound semi-annually as the interest earned
then pays interest i mean that's a feature that most bonds don't have how are i-bonds taxed well
the owner of the i-bond has the option the option to pay the federal tax on the interest annually
or when the bond is cashed in essentially if you wait until it's cashed in they could act like a
non-deductible ira contribution when you don't pay any tax on the ira assets until they are withdrawn
additionally series i bonds are exempt from state and local taxes on the interest
this makes them even more attractive in high tax states like california and new
york because your tax equivalent yield could approach eight percent when do i bonds mature
i-bonds have a stated maturity of 30 years but don't worry you don't have to hold them that long
that's just the point that they stop paying additional interest an I bond must be held for a
minimum of 12 months after the purchase but after that can be redeemed at any time there is a catch
though if you redeem an i bond between years 2 and 5 the prior 3 months of interest are forfeited but
at today's low interest rates that penalty would most likely still yield you more than
sitting in a checking or savings account earning pennies so how do you calculate the interest rate
ibond interest consists of two parts a fixed rate that's set at purchase and an inflation rate that
changes every six months typically november 1st and may 1st now you may not have heard of these
I bonds because for decades they paid next to nothing but in 2021 as inflation has ramped up
so have the payments the november interest payment credited is an annualized rate of 7.12
it represents a fixed interest payment of zero percent and a semi-annual interest rate of 3.56
that means for the six months after purchase you would earn a return of 3.56 percent
then the interest rate is reset at whatever the government stated inflation rate is at that time
let's just say the inflation rate is the same at that time as it is when you got it you would earn
another 3.56 percent for the next six months making an annual return of slightly more than
7.12 because of that compounding effect we talked about earlier let's go take a look at this on the
government's website at treasurydirect to learn more alright so here we are
on the website and we're going to go over here in this individuals area to how to buy series i bonds
when we click on how to buy series i bonds what you can see is that right at the top the initial
interest rate on new series i savings bonds is seven point one two percent you can buy either
i bonds at this rate through april 2022 okay this part goes through all the stuff what it is lots of
what we're going through in this video is in more detail here you can also look at how to register
it how to redeem it replace it convert it tax considerations but what we're going to look at is
the rates and the terms okay so as we look at the rates and the terms and how to calculate them this
tells you how the bonds are in interest we talk we we're talking about compounding semi-annually
how this payment is made we're looking at how do they figure it they figure it with a fixed rate
and an inflation rate okay combining the two rates together currently zero percent for the fixed rate
3.56 for the semi-annual inflation rate that's how you get to this composite rate of 7.12
this is when the bond rates change what have rates been in the past i think this is really
interesting so we talked about why many people just not didn't know about these bonds well
if you go back and you look at interest rates this is a fixed rate for these bonds
they've been paying zero since may of 2020 and before that they were half a percent and they were
zero point one point one point two zero back in twenty ten um you gotta go back all the way into
the early two thousands to get an interest rate on the fixed rate of one to one and a half uh and go
back to 1998 to be getting three and that's when interest rates were like seven percent for money
in a money market now let's look at the inflation rates now historically you go back to 98 99 it was
like 0.6 0.8 1.7 1.9 you know these were a little bit higher in 001 then they dropped down again
um a couple times they reached two and a half percent in 2008 uh once in 2011 it was 2.3 but
most of the time these inflation rates were below a percent here in 2015 was actually negative
um but not very much and then all of a sudden here we go 3.56 percent in 2021 this is the
highest that it's been and here the the composite rates for the i bonds you know this will show you
you add those fixed rate with the inflation rate what those different bonds are paying
and you know it's about seven percent for most of these bonds that are in here you have to go
back to the early 2000s and 98 99 where you're at eight nine and ten percent on these bonds
and you had to wait 15 almost 20 years before you were getting this type of interest rate
you know on these bonds so you know that's why not many people know about this because it's
it's more of a recent phenomenon with this 3.56 it just showed up in november all right
let's head on back over and learn more about i bonds all right so now that we know more
about i bonds and the history of them how do you purchase an ibot well you can invest
in an i-bond electronically online at the treasury direct website there is not a secondary market for
these i-bonds so you can't resell them you must redeem them directly through the us government
now what are the limits of course there's limits digital I bond purchases are limited
to ten thousand dollars per social security number per calendar year you must have a social security
number and either be a u.s citizen living here or abroad or a u.s resident and as a parent you can
also invest in I bonds on behalf of a minor child so for example let's take a family like mine a
married couple with two children we could invest up to forty thousand dollars each calendar year
into ibots ten thousand dollars for each spouse and ten thousand dollars for each child
yet people still try to do it technically it appears that you could find a custodian
willing to invest the money on your behalf if you self-direct the ira but the hoops you
might have to jump through can be significant and additionally if you did that you'd lose one of the
main benefits of ibons the tax deferral because retirement accounts already have that benefit as
i publish this video there are a few weeks left in 2021 and for the first time in nearly 30 years
there is an opportunity worthwhile in ibots in order to maximize this strategy what you could do
is open and fund ibon accounts with ten thousand dollars before december 31st then invest another
ten thousand dollars in early 2022 basically getting 20 000 per social security number
into ibonds at the highest interest rates in the past 30 years now it's important to remember
that any money you invest into the i-bonds must be held for 12 months before redemption
in summary if you have money that's sitting and checking your savings accounts
that's not earmarked for growth investing and will not be needed in the near future
i think it makes sense to take a hard look at investing in ibots i realize that every person's
financial situation and their risk tolerance is different this is not personal investment advice
do your own due diligence and discuss I bonds with your financial and tax advisors and of course
interest rates are subject to change they're not constant inflation could come back down
a year from now and these bonds might not be paying much of anything or inflation could
persist go even higher and they could continue paying interest above other comparable investments
the future it's unknowable but for the next six months we know that these bonds will pay
7.12 percent annualized now do you already own I bonds if so let me know about your experience
down in the comments and if i was able to shed some light on these investments make sure you
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