are ibn's a money trap or a great place for you to park your cash for a government guaranteed 9.62
return with inflation at 9.1 percent the s p 500 down by 20 year-to-date and the average savings
account only paying a sad 0.1 percent interest rate it makes ibonds sound like a great option
so in today's video here's what we're going to discuss number one what exactly are i bonds
number two are they really a money trap or a great place to park cash number three the taxes on eye
bonds and how to potentially even avoid taxes and a few other cool points along the way so if
you're ready to get started don't be dumb tap the thumb down below and let's get right to it
so i bonds are a type of savings bond you take a fixed rate set by the government combined with the
current inflation rate and that's what gives you the rate of return now the rates are set
two times a year and right now it's nine point six two percent rate of return on any i bonds
purchased between may 2022 all the way through october 2022 the next rate will take effect in
november of 2022 and lasts until april of 2023. so inflation's at 9.1 percent and the annual
interest rate according to treasurydirect.gov is 9.62 clearly out beating most all of stock
and crypto let's be honest in 2022 right now and some people even say the next round which starts
in november as i mentioned could be anywhere from 10 to 12 now that's an important piece to know
is when you buy a bond and especially an i bond right now the fixed rate right now today is set
at zero so you're basically getting the rate as you buy your bonds based on the going rate right
now which is that nine point six two percent in this year alone you can only do up to ten thousand
dollars of i bond purchases now keep in mind you can also do an additional five thousand dollars in
paper bonds but you must do that based on your tax return so typically for most people you can do ten
thousand dollars of ibots per year and then if you have a very nice tax return you could maybe get
that extra five thousand but realistically let's just say it's ten thousand but having ten thousand
dollars with a nine point six two percent rate of return on an annualized basis is pretty darn sweet
don't you agree but it's not always that case especially with a fixed rate of zero percent so
let's hop over to the ipad and draw this out a little bit because i think it'll be very important
to know what i'm about to show you right here we are on the ipad now right here we can see an issue
date from may to october of 2022 the fixed rate is at zero percent but of course that inflation rate
gives us the fixed rate on the i bond of 9.62 but take a look at this if you would have purchased
let's say way down here in 2019 right here let's say you bought an i bond at a fixed rate of 0.5
look at your rate of return right here 10.14 percent so if you've held onto your i-bond
since purchasing it in 2019 your annualized rate right now is actually looking even better for this
particular period that we're looking at so it's important to know that based on inflation the i
bond can change the interest rate and if you get a bond anytime in this period where you're at zero
percent on a fixed rate that means if inflation comes back down you could be seen back here
you know one percent maybe two percent here's one percent in fact in 2009 when we were in negative
inflation when we were actually deflationary you got zero percent no return on your money at all
so that's one thing to keep in mind when jumping into eye bonds right now they're hot and sexy and
for very obvious reason inflation is at a 40-year high so i don't anticipate it dropping any time
soon but over the long period of time let's say you're going to buy an i-bond and your goal is to
leave it there for 30 years you probably will see some ebb and flow and not constantly get that 9.62
over that long period of time i'll link this entire sheet in the description below that you
can check out after this video but just keep in mind based on historical rates the key part is
those people that took advantage of these fixed rates in the one percent of course they're now
enjoying a much higher rate but there were times that they were only getting a measly three percent
when the stock market was doing much much more than three percent and this brings us to the
next point are i bonds a big money trap because here's one thing that you need to know when you
buy an eye bond let's say you're gonna tie up ten thousand dollars you're gonna go into the maximum
all the way up to ten thousand dollars and you're gonna say i'm buying it right now
those i bonds cannot be cashed in until one year minimum so once you put that ten thousand dollars
consider it locked away in prison for one year after one year between one year and five years
if you decide to cash out before the fifth year you would then lose the previous
three months of interest and if you're looking at the interest rate that we just looked at at a 9.6
or even a 10 or 11 percent you got to be careful about cashing out all of that great money because
you're losing three months of that interest rate and the i bond can be held and mature up to 30
years so you can hold on to that it'll continue to generate interest based on the interest rate
set every six months and you can do that all the way up for the next 30 years but keep this in mind
your money trap and the reason i say a money trap is that if you're trying to get a quick interest
rate of a 9.62 and the idea would be let me put in the money and cash it down in a year you're going
to be highly disappointed so be careful about that because it's going to be locked up for a year
and then at that point if you decide to cash it out between the one and the five year you're gonna
lose money on that interest rate and on top of that that brings us to point number three and that
is you gotta pay federal taxes of course uncle sam is always interested in your money anytime
you're making money so he likes to put his dirty little grimy fingers all over any type of interest
earnings that you have so you will have to pay federal tax on any type of i bonds that you cash
out now keep this in mind you don't have any state tax no matter where you live in the united states
right now there are no state tax on eye bonds for the cash out but federal tax yes there is
but there is a way that you could actually reduce or completely eliminate your tax bill and right
over here you'll see on treasurydirect.gov the official website which is very archaic and it
looks like it's from 1998 but that's just my opinion but look at this you can actually
save taxes right here it says it by using it for higher education so you could go in and
do anywhere from one dollar up to ten thousand dollars maximum per year into the i bond right
now paying at nine point six two percent and save that for educational reasons let's say
you have kids and you want to do a little bit of a college savings account this could be a strategy
that you could use but there are some strings attached and i'm going to explain them right now
so education planning has a lot of qualifiers to it so you can take the exclusion of not paying any
federal tax on the cash out of your i-bond if and only if you crashed the qualified u.s savings bond
in the same tax year for which you're claiming the exclusion that's pretty obvious you know same year
same amount then you paid the qualified education expenses in the same tax year for yourself
your spouse or your dependent and that's a very important piece you want to make sure that if
you're going to cash out your i-bond you're using that directly for that higher education expense in
the same year that you get the money out you don't want to think ahead and say i'm going to cash it
out in this year and then next year i'll pay the higher education bill it's got to be in the same
tax year and the most important part is this one right here that i'm going to jump right to and
that is irs form 8815. i'm going to click on it because it contains a very very important piece
that some of you may not qualify for if you come in here and you zoom in to this particular form
when it comes down to saying i want to save money on my interest that i earned on my i bond you have
to make as of the recording of this video 2022 you cannot make more than 98 200 or more if single
head of household or qualifying widow or 154 800 as a combined couple married filing jointly
so you cannot take the exclusion so look at your modified adjusted gross income and a best way
to look at that is look back on last year's tax return and then think about how much more money
are you going to make this year if it's more than that or you think down the way you're going to use
this as a college education fund and then down the way guess what happens you make more money
that exceeds whatever this particular amount is in the future you won't be able to save money on your
tax bill but i mentioned at the beginning of this video that the s p 500 is down 20.13 year-to-date
and this is where things get a little bit interesting and something to keep in mind to
see what works best for you if you're looking for a very conservative guaranteed rate of return of
interest that you're willing to depart and leave it in there for at least a minimum of one year
ideally more than five so you can take advantage of the full interest then that would be okay
that's something that you could look forward to because you're okay with that conservative
investment even if it drops from nine percent back down to let's say three two or even one percent
of annualized interest because if you look at the stock market in the case of the s p 500
you see it's down 20 you might immediately think well it seems to me that the bonds are a better
way to go especially with inflation so high but one consideration you should make if that
is the bulk of the amount of money that you're going to put in even if you only have 100
and you decide i want to put this money somewhere tucked away and i want it to
compound and earn some money you could put that 100 into ibond or you could put it in the s p 500
if you zoom out let's say we look at the five year things change a little bit differently if you look
at the five year look at that it went up 54.94 in the last five years if i go to the maximum
it looks even better of course at 3 345 but even more realistically if we go back and let's say
we bought an i-bond in 2011 and i'm going to look at the return of the s p 500 from january
of 2011 and we're going to scroll all the way up here to the current date you can see right there
it is at 201 percent in the s p 500 in the last 10 years so that's something to keep in mind if
you're gonna leave your eye bond sit in there for 10 years and you're okay with the fact that it may
underperform the returns you could get on the stock market that is a consideration you should
be thinking about make sure though that you check out this video next on a very interesting
high dividend etf that's currently paying about 11 in dividends we'll see you on this next video