I Bonds – A Financial Tool to Battle Inflations

Inflation is here, and so are government bonds that are popular again. I’m talking specifically about I Bonds. We’ve recorded a quick video to go over what I Bonds are, how they may impact your situation, what you need to know, as well as how you can go about purchasing them if you think it’s right for you.

Inflation is here, and so are government bonds that are popular again.

I’m talking specifically about I Bonds.

We’ve recorded a quick video to go over what I Bonds are, how they may impact your situation, what you need to know, as well as how you can go about purchasing them if you think it’s right for you.

When I graduated from college in 2003, in all of my finance classes, we talked about inflation. In fact, we talked about inflation so much that I thought this was going to be an everyday part of our life.

And pretty much from 2003 all the way through until the end of last year, we never even saw any inflation.

It was something we never talked about. And in fact, most of my clients didn’t even think it was a real. Well, it’s here now, and the purpose of this video is not to talk about inflation, but the purpose of this video is to actually talk about a tool that some people are using against inflation.

So today we’re going to talk about the government issued I Bonds. I Savings Bonds. The “I” stands for inflation, and because we’re talking about a specific tool, I’m actually gonna put a disclaimer on this video that I don’t normally do.

But this video is not to tell you to go buy I Bonds. I’m not recommending them to you. This is not me telling you to do something.

This is just me educating them, educating you, about I Bonds and educating you hopefully to a point where if you decide you need them or don’t need them, you can at least make that decision on your own.

As with any tool, it should be combined with the rest of your planning process. And if you need help with that planning process, that’s what we do here.

Now, let’s talk about I Bonds. What are I Bonds? I Bonds are issued by the U.S. Treasury, and they’re like any other savings bond that is out there.

The nice part is what they pay. They pay an interest rate that is linked to inflation. So if you look at the series E Bonds, series EE Bonds that are paying in the low 1%, 2%, 3%, really low interest rates.

I Bonds, because they’re linked to inflation, right now as we shoot this in April 2022, they are paying 7.12%. So 7.12%, that’s guaranteed for the six months because they reset the interest rate every six months.

The reset is coming up here actually in May 2022. So if you’re watching this in May the new interest for the second half of 2022 is 9.62%.

So if you asked me if you could have a government issued bond, which is as close to guaranteed as any investment could possibly be, we’re not allowed to say guaranteed and our industry, but is as close to guaranteed as any investment could be, 9.62% is pretty amazing.

It’s designed to keep pace with inflation. So let’s talk a little about how these work. There is a maximum that you can put in. You can only put in $10,000 per year per person. So my wife and I could each put $10,000 in, so we could do $20,000 per year if we wanted to.

We also have three kids, so we could put $10,000 for each kid if we wanted to. But it’s $10,000 per year per person.

You have to buy them directly online through what they call the Treasury Direct website. I’ll show you that here at the end. 

Downsides – You have to hold it for a year. You physically cannot sell it for one year. So if you buy it on May 1st, you have to hold it until May 1st of next year.

Now you have to hold it for five years, if you want complete liquidity. So if you want to get all the interest you’ve earned, after five years it’s completely liquid. But during that five-year period, every six months, they’re changing the interest rate. You are not guaranteed to earn 9.62% that whole time period. Every six months, they do change that interest rate.

So what happens between that year one and year five? Well, if you cash the bond out, which you can at any point in time, you can cash it out and they’ll give you your money back, plus whatever you earned. But they’re going to take back the last three months of interest.

So if you cash it out next August, they’re going to take away your May, June and July interest for you because you didn’t keep it for that full year. You’re allowed to get the money back, but you’re going to pay that penalty there.

The purpose of these bonds is to keep pace with inflation. It’s as safe, if not safer than cash. It has the same government guarantee. But it’s paying 9.62%.

Let’s talk about how these are taxed. Now these are taxed at the Federal level. They are not taxed at the State level. So what happens is, if you put the $10,000 in and you earn the 9.62%, that’s $962 of interest. That sounds pretty good.

And you have the choice – you can either pay that money every year as it earns. Or, you can wait until the end when you cash that bond in and you can cash it anytime after a one-year time period, all the way up to 20 or 30 years.

Whenever you cash that in, whatever interest you earn on that, then it will be included on your tax return.

So who are these right for? These are right for people that are holding cash and you don’t know what to do with it. You’re not going to need this cash for at least a year. And you want to earn some more interest than what the banks are paying you. That’s where I would use it in my situation.

There’s a few other caveats, U S government savings bonds, if you use them for education, so it’s a savings tool for kids education, you do not have to claim the interest if it’s used for education, which is a pretty unique thing as well.

If you want to buy these bonds, there’s only two ways to do it. First is through a tax refund. If you take your tax refund and you ask for a U.S. I Bond, you can get $5,000 worth. They could send you a paper bond. Very few people do that.

The more common way is to buy it directly through the government. And to do that, you have to go to their website. And their website is here, this is the treasurydirect.gov. I’ll say that again: treasurydirect.gov, and you can buy series I Savings Bonds here.

So there’s lots of different things you can buy here. But what you’re buying is you’re buying a series I Savings Bond.

Now, in order to do this in order to set it up, you actually have to open up your own account. So what happens is you have to go to “My Accounts” on the treasury direct website, and you have to click on this open an account button. It will walk you through the process of opening an account.

You will link your bank account to the account. So when you open the account make sure you have a check handy, so you can link your bank account to your treasury direct account.

I will tell you this website is slow. It is really, really slow. But as long as you take your time and you’re patient with it.

Now what happens, the first thing they do, as with any financial account, they’re going to verify your identity. And they try and do it immediately. If for some reason they can’t, you’ll get an email from them that has a process that you can walk through to verify your identity.

Once you have the account open, then you are free to buy your U.S. I Savings Bonds, and they will sit into your account until you decide to close them out.

This treasury direct account is like having an online bank account, treat that account as a password is very secure. But this is how you’re going to go in and you’re going to be able to purchase any of these vehicles.

Like I said, these can be a great tool for trying to beat inflation. And they can really benefit you as opposed to cash. But remember they have to fit into your overall planning situation.

And if you have more than $10,000, or $20,000 if you’re married, and you want to know what to do with it, is it part of your overall bigger plan, please let us know. We’d be happy to help you try and figure that out.

I hope you got something out of this video. If you want to know how it applies more to your personal situation, please feel free to book a 15 minute phone call with my team.