I bonds, or what is known as “I bonds,” are a safe investment characterized by guarantees and tax-deferred inflation-adjusted interest, and after one year, you can easily withdraw your funds. Where can you obtain guaranteed tax-deferred interest on a safe and liquid investment, knowing that if interest rates rise, they are likely to rise as well? This is what makes I bonds an excellent choice for safe cash investment.
I Bonds Can Complement Your Emergency Fund
I bonds are a great option for a second-tier emergency fund. They are second-tier because you cannot sell them during the first 12 months after purchase, so you will need other liquid funds to rely on while building your I bond inventory.
The maximum amount you can purchase is $15,000 per person in a single year; up to $10,000 in electronic bonds and $5,000 in paper bonds. You can open an account directly with the Treasury through the TreasuryDirect website. There is a minimum purchase amount of $25 for electronic bonds and $50 for paper bonds.
The interest earned on I bonds consists of a fixed interest rate and an inflation rate. The fixed interest rate remains constant throughout the life of the bond, while the inflation rate is determined twice a year. Interest accrues semi-annually and is tax-deferred.
When Do I Bond Rates Change?
I bond rates change according to the month they were issued. New rates take effect on January 1 and July of each year. For example, if a bond is issued in January, new rates will come into effect on January 1 and July of each year.
How to Buy I Bonds
You can open an account at TreasuryDirect and link it to your bank account to transfer money to buy the maximum I bonds each year. The minimum purchase for I bonds is only $25. You can buy paper bonds directly using your tax refund each year. You can use all or part of your tax refund.
Note: Healthcare costs and your expenses during retirement can reach $300,000. Depending on your age and the number of years you plan to retire, I bonds can provide you with safe, guaranteed, and inflation-adjusted investments to cover healthcare costs during retirement.
Differences Between I Bonds and TIPS
TIPS (Treasury Inflation-Protected Securities) differ from I bonds. Unlike I bonds, the interest on TIPS is not tax-deferred, so it may be better to hold this instrument inside tax-deferred accounts like an Individual Retirement Account (IRA) or a Roth IRA. Unfortunately, you cannot open an IRA account directly in TreasuryDirect, so you must purchase TIPS in your IRA through a brokerage account.
Tax Treatment of I Bonds
Taxable income on Series I bonds can be deferred until redemption time. With bonds you’ve held for decades, the amount can become significant. If the proceeds are used to cover higher education expenses, the bond can be excluded from taxable income. Otherwise, the interest you earn from I bonds is subject to federal income tax, federal estate and gift taxes, and any state inheritance or estate taxes.
Frequently Asked Questions (FAQs)
How can I find out the value of my bonds? You can use the TreasuryDirect website to calculate the value of your savings bonds. If you have electronic bonds, just log in to your account and check any bonds you currently hold. For paper bonds, you can use the online calculator to enter the bond information and find out its current value.
How much…
How long does it take for my savings bonds to mature? Series I bonds mature in 30 years or until you redeem them, whichever comes first. Interest will accumulate as long as they are in maturity. You can redeem the bond after 12 months from the date you acquire it. However, if you redeem it before it is five years old, you will incur a penalty equal to the last three months of interest.
How can I redeem my savings bonds? You can redeem electronic bonds on the TreasuryDirect website and deposit the proceeds directly into your checking or savings account. If you have paper bonds, you can take them to your bank for redemption or send them to Treasury Retail Securities Services, along with FS Form 1522.
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Sources:
TreasuryDirect. “Buying Series I savings bonds.”
TreasuryDirect. “Rates and terms for Series I savings bonds: Calculating interest rates.”
Fidelity. “How to plan for rising healthcare costs.”
TreasuryDirect. “Treasury Inflation-Protected Securities (TIPS).”
TreasuryDirect. “Education planning.”
TreasuryDirect. “Tax considerations for Series I savings bonds.”
TreasuryDirect. “Redemption (cash) of Series I savings bonds.”
Source: https://www.thebalancemoney.com/i-bonds-best-safe-investment-you-can-make-2388902
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