How to Use I Bonds to Protect Your Wealth from Inflation

You may have been hearing more about I Bonds as one way to counter the effects of the inflation we’ve seen on the rise these past several months. Currently an I Bond purchased between May 2022 through October 2022 yields 9.6% on an annualized basis. Seems like a no-brainer, and in many ways that is true. But we’d like to run through the pros and cons of investing in Series I Savings Bonds.

I Bonds are issued directly by the U.S. Department of the Treasury and cannot be sold on the secondary market. They are issued for a 30-year term, although they could be redeemed before maturity. They must be held for at least one year, but if redeemed within 5 years of purchase, then the most recent 3 months of interest is forfeited. Just as with traditional Series EE bonds, the interest on I Bonds accrues and is not paid out to you until the bond matures or is redeemed.

Interest rates on I Bonds re-set every six months based on a fixed rate (as of this writing, currently 0%) plus a semi-annual inflation rate based on the Consumer Price Index (CPI, as of this writing 4.8%). Interest compounds semi-annually and is then added to the principal of the bond at the end of the six month period so that interest for the next six months may be earned on the increased value. Keep in mind that as rates re-set twice a year, the annualized rate on the I Bond will vary over the holding period. And while the rates are appealing now, they could decrease (or increase) over the term of the I Bond.

Some pros to I Bonds:

• Due to recent increased inflation, the current rates are very attractive, particularly given that bonds have been having a tough time in 2022.
• While the interest, when redeemed, will be taxable as ordinary income at the federal level, I Bond interest is tax-free at the state and local level.
• After one year, you have the ability to redeem your I Bonds, so they are not locked up for the entire term.
• The three-month penalty between years 1 and 5 of the term is a relatively minimal penalty given where current rates stand.
• I Bonds could potentially be tax-free if they are used for higher education in the future, provided the account holder meets certain criteria and their income does not exceed the benefit phase-out range.

Some cons to I Bonds:

• I Bonds cannot be purchased in a tax-deferred account such as an IRA, 401(k), or Roth IRA.
• I Bonds cannot be purchased through traditional brokerage accounts. Instead, an individual must use the government’s website TreasuryDirect.gov to purchase electronic I Bonds directly. Paper I Bonds are also available, but they must be purchased using all or a portion of your federal tax refund when filing your tax return.
• Here’s a big one: purchases are limited to a $10,000 maximum each calendar year for electronic I Bonds and a $5,000 maximum for paper I Bonds under each social security number. Electronic I Bonds start at $25, paper I Bonds start at $50, and both can be purchased in any increment.
• The inflation rates listed at purchase will fluctuate over time and may decrease (although your principal investment and compounded interest will not decrease).

If you are interested to learn more about I Bonds, and feel this would be appropriate for you or your family members, please feel free to reach out and ask us questions.

Your Bridgewater Advisors Team

Disclosures:
– This is not a solicitation, or an offer to buy or sell any security or investment product, nor does it consider individual investment objectives or financial situations.
– Information in this material is not intended to constitute legal, tax or investment advice. You should consult your legal, tax and financial advisors before making any financial decisions.
– IRS Circular 230 Disclosure: Pursuant to IRS Regulations, neither the information, nor any advice contained in this communication (including any attachments) is intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.