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  

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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you