Interest in Ibonds

Note: I am not a financial advisor, nor do I play one on TV. This article is not a suggestion for you to buy anything. It is my thoughts on something interesting to me. If you'd like to learn more, do your own independent research from reputable sources. 

This week I came across a reference to I-bonds. I had never heard of them. Apparently they have been getting quite a bit of notice lately, and for good reason. The interest paid on I-bonds is made of two components: a fixed rate that is set when you purchase the bond (currently 0%) and an inflation rate the changes every 6 months based on the Consumers Price Index for All Urban Consumers (CPI-U). The inflation rate through the end of October is 3.54%. That's way better than you are going to find for any other ultra safe investment. But here's the kicker- the inflation rate goes to 7.12% effective November for the next 6 months. Yes, 7%! As always, interest on U.S. bonds is exempt from state and local taxes, and you only pay federal income tax on the interest if you redeem the bond or when it matures in 30 years. The interest might even be exempt from federal taxes if it's used for certain higher education expenses. Quite a deal. 

Purchase dates are interesting with I bonds. As long as you purchase by the end of October, you are credited as having owned the bond effective October 1st for interest purposes. If you purchased on October 27th (latest day I've seen advised to make sure the purchase is credited for October), this how your interest would work for the 1st year:

October-March: 3.54%

May-September: 7.12%

After that, the rate will reset to a new rate based on changes in the CPI-U. Do note: you have to leave the money in the bond for at least one year, and if you redeem it any time in the first five years of ownership, you forfeit the last 3 months of interest.

Here are some resources if you'd like to learn more. I have found this very intriguing.

Treasury Direct

Doctors of Credit article on I-bonds

The Finance Buff article on I-bonds

P.S. I read about someone who bought I-bonds when the fixed portion was 3%. That person's bonds will be paying over 10% (3%+7.12%) come November, all for an ultra safe investment. Happy times to that person.