Are I Bonds Still Worth It, #136
I bonds were one of the hottest investments of 2022. But lower interest rates have one listener wondering if they are still worth a spot in her portfolio? On this episode, I’ll break down what I bonds are, why they took off in 2022, if they are still worth it in 2023, and potential investment alternatives.
You will want to hear this episode if you are interested in...
What is an I Bond? [1:40]
Why I bonds were one of the hottest investments of 2022 [3:50]
The benefits and restrictions of I bonds [5:55]
How to buy I bonds [8:34]
Are I bonds still a good investment? [9:55]
Exploring I bond alternatives [12:18]
Breaking down I bonds
Before we can determine if I bonds are still a sound investment in 2023, we need to understand what they are. An I bond is a U.S. government savings bond. Government bonds are considered one of the safest investments you can make because of the U.S. democratic system’s stability and payment history. We have never defaulted on any of our payments. The “I” in I bond stands for inflation, and the interest you receive from the bond has two components.
The first part is a fixed rate determined when you purchase the bond. Currently, the fixed rate is sitting at 0.40%. The second part of the bond is tied to a measurement of inflation known as the Consumer Price Index Urban (CPI-U). Every May 1st and November 1st, an interest rate is determined for the I bond based on changes in the CPI-U over the previous six months. Adding both numbers together will determine what percentage of interest you will earn for the year.
What are the pros and cons?
There are several perks to investing in I bonds. You don’t pay interest on the bonds while they are deferred. Meaning the interest that you receive just gets added to the value of the 30-year bond. They also typically have a higher interest rate than most checking or savings accounts. And if you use them for education, there is no federal tax on the interest you pay when you redeem them.
However, I bonds do have their fair share of restrictions. One of the biggest sticking points is that you can only purchase up to $10,000 in I bonds per Social Security number or Tax ID per year. The lowest denomination being $25. The only way to get around that limit is by putting up to $5000 into I bonds directly through your federal tax return. Other restrictions include the inability to sell I bonds until you’ve owned them for one year. And if you sell them in under 5 years, you will owe a penalty of 3 months' interest. So are I bonds still worth it? Listen to this episode to find out!
Resources Mentioned
Connect With Morrissey Wealth Management
www.MorrisseyWealthManagement.com/contact