AsWhile the country is recovering from the pandemics, rising prices have become a worry. Americans. ButPeople looking to protect their cash have an option because inflation has driven up the rates of some government savings bonds.
NewSeries I savings bonds, also called inflation bonds or I bonds, will be issued over the next six month. You will be paid 7.12 percent Treasury DepartmentAnnounced this week ThatAccording to the department, this rate is the second highest ever offered on bonds. TheFor I bonds that were issued after January 1, 2019, a new inflation-based rate will be applied NovemberFrom this year to next AprilAs well as older I bonds that still earn interest.
ByThe average online deposit rate for a 1-year certificate of deposit is below 0.5 percent according to financial website DepositAccounts.com.
“It’s a pretty good deal,” said Stephen BiggsHC’s chief investment officer, Financial AdvisorsIn Lafayette, Calif., the current rate for I bonds.
Savings bonds generally are low-risk investments, but I bonds’ rate structure is complicated and there are drawbacks, like limits on how much you can buy and penalties if you cash them in early.
“While Series I bonds may sound really attractive at first glance, investors should carefully consider the complexities coupled with the cap on the purchase amounts before making an investment,” said Kevin Shea, senior portfolio manager at Creative PlanningWealth Management Firm in Overland Park, Kan.
TheInflation bonds are first issued in 1998. The rate they earn is divided into two parts. One is a fixed base rate for the duration of the bond and one that fluctuates based upon inflation. Consumer Price IndexThe clock, which resets every six months, can be found in MayAnd November. The Treasury Department applies a formula to combine those two rates into a “composite” rate.
ForThe fixed rate for I bonds was a depressing zero for more than a decade. Yes, zilch. ThatThis means that all interest on these I bonds is earned at the variable inflation rate. NoIt is not known if this current bout of brisk inflation will end soon or if it will continue into next year. But if the bonds’ inflation rate were to fall, while the fixed rate stayed at zero, the rate paid on the bonds could be less attractive.
The composite rate for new bonds could even reach zero — although it’s guaranteed to never go below that. So you’ll at least get back your original investment when you redeem the bond, according to Treasury.
You won’t owe state or local income taxes on the interest earned, but you will owe federal income tax — although you can wait until you redeem the bonds to pay it. (IfYou may be eligible to avoid some or all federal taxes if you use the money to pay for higher education.
InflationIf you redeem bonds earlier, bonds will pay interest for 30 more years. YouYou can redeem digital I bonds online, and the money will be deposited into your bank account. IfYou can still redeem paper bonds if you are still holding them. Treasury Direct.
SaversPeople who purchased I bonds many years ago when the fixed rate component was lower might be now earning double-digit composite rates. HoldersIssued bonds from MayTo October 2000, for instance, will earn 10.85 percent because the latest variable inflation rate is added to the bonds’ fixed rate of 3.6 percent, said Ken TuminDepositAccounts.com founder:
ToCheck on the current rate of your bond to see if it is paying. TreasuryDirectThe website is operated by BureauYou can find the Fiscal ServiceThe a part of the Treasury Department.
SoHow can you buy I bonds ThereThere are two possible ways. TheFirst, you need to buy them TreasuryDirect.gov. To do this, you’ll first need to establish an online account with a minimum deposit of $25 and link it to your bank account. You won’t receive a paper bond; most new savings bonds are electronic and remain in your digital account.
YouYou can purchase up to $10,000 worth of digital I bonds per year.
TheYou can also buy I bonds tax-time with your federal income taxes refund. You can buy up to $5,000 in bonds this way — the only way left to get paper savings bonds.
A couple filing a joint tax return can buy up to $25,000 a year — $10,000 each, plus an extra $5,000 at tax time. It’s possible to buy more, by purchasing I bonds as gifts.
ThereThere are also other caveats. YouYou must keep the bond for at most 12 months before you can redeem it. SoIf you’re using the bonds to raise emergency funds, Mr. TuminThis means that you should keep extra cash aside for emergencies. “It’s not an ideal emergency fund,” he said.
And keep in mind that if you redeem an I bond before five years, you’ll owe a penalty worth the interest of the previous three months.
TheThis latest round of inflation might be temporary. I bonds should be considered in addition to other options for beating inflation over the long-term. Jacob KueblerSenior financial advisor with Bluestem Financial AdvisorsIn Champaign, Ill. “Over a long period,” he said, “the stock market is a good inflation hedge.”
Source: NY Times
