I-Bonds Paying More than Ever (but Read the Fine Print)

This Inflation-Resistant Investment Has Some Crucial Fine Print

Inflation is rising at a record pace not seen in over 40 years (now 8.5% year-over-year). With that in mind, many retirement savers are looking for safer places to put their hard-earned dollars that will also preserve buying power.

One possibility for savers to consider has been Series I Savings Bonds, which are issued directly by the U.S. government and purchased via the TreasuryDirect.gov website.

Now, these Series I savings bonds (usually shortened to “I-bonds”) are interesting. They pay both a fixed interest rate and a variable interest rate that’s pegged to inflation. The variable inflation rate on Series I bonds resets every six months, altering the interest paid to investors.

Thanks to rising inflation, I-bonds are estimated to provide an annual return of 9.62% when the latest rate update comes out on May 2, according to CNBC.

Wow – a 9.62% guaranteed return on investment, backed by the U.S. government? That sounds like welcome news for American savers looking to save money without sacrificing purchasing power (at a time when even the very best savings accounts are paying -7% at best after inflation).

The same article quoted Christopher Flis, founder of Resilient Asset Management in Memphis, Tennessee:

The 9.62% is an eye-watering number. Especially given how other fixed-income assets have performed this year. I-bonds may be worth a look if you’re seeking ways to beat inflation.

The problem with “good news” like this is? There’s almost always more to the story than just an “eye-watering” interest rate. Unfortunately, I-bonds are no different…

Limits, buying power, the Taxman (and more)

Unfortunately, even though I-bonds keep pace with inflation, there are some shortcomings that will limit their effectiveness in a retirement savings plan.

Redemption limitations

There a couple of drawbacks to I-bonds right out of the gate. First, you cannot redeem them within the first year you own them. So don’t go investing your entire emergency fund in I-bonds.

Second, if you liquidate an I-bond within five years, you’ll lose the previous three months of interest. (This isn’t terribly different from many bank CDs, and probably worth it if you really need the money.)

Purchasing limitations

Depending on the size of your nest egg, there’s a potential downside. The federal government thinks I-bonds are such a great deal they actually limit the amount you can buy!

Here are the limits, according to Treasury Direct:

In a calendar year, you can acquire:

> up to $10,000 in electronic I bonds in TreasuryDirect
> up to $5,000 in paper I bonds using your federal income tax refund

The limits apply separately, meaning you could acquire up to $15,000 in I bonds in a calendar year. Bonds you buy for yourself and bonds you receive as gifts or via transfers count toward the limit.

Even if you’re limited to $15,000 in purchases annually, I-bonds might not seem so bad!

Unfortunately, even if you wait five full years before liquidating, you probably won’t get to keep all the proceeds…

Taxes

When you do sell your I-bonds, every penny of interest you received is subject to federal taxes (but not state or local taxes). You’ll receive an IRS Form 1099-INT because that interest you received is considered income. You can also choose to report the interest every year, although it is a more complicated situation than filing “at the end when interest is paid.”

Now, this entire detail is completely absurd. The government offered us this investment! They designed it to keep pace with the official rate of inflation – which, as we’ve discussed many times in the past, is driven by government spending. By purchasing an I-bond, we’re already paying for that spending, aren’t we? And it’s not our faults inflation is skyrocketing, is it?

So why penalize American savers by taxing the “profits” the government agreed to pay based on the rate of inflation that’s only soared higher and higher from outrageous government spending?

Are we imagining things, or are people who buy I-bonds being taxed multiple times – not just on your income, and your interest, but also sneakily, with the tax no one voted for and everyone pays?

Maybe you’re thinking, “Well I’ll just buy I-bonds with my IRA funds, so I don’t have to worry about taxes.” Good thinking, but the government thought of that, too. I-bonds are not allowed in retirement accounts.

One final consideration

The last concern we have with I-bonds requires looking at the bigger picture. Since I-bonds only purport to match inflation’s devaluation of your money, and since they pay in U.S. dollars, then your buying power is still at risk.

That’s because the dollar has lost 41.3% of its buying power since the year 2000, according to the official St. Louis Fed chart below:

That’s a bitter pill to swallow. But in spite of these drawbacks, those of us forced to struggle with inflation that is spiraling out of control must use every advantage we can get.

At least we must if we want a secure financial future to be more than just a daydream.

I-bonds may still be a viable choice – but they aren’t the only one

Yes, in some ways they’re less than ideal. I-bonds are still one of the better inflation-resistant investments available to most Americans. We’ve devoted an entire comparison page to inflation-resistant investment choices so you can learn more.

Why do we consider I-bonds one of the better picks? Because most Americans don’t have a self-directed IRA. With an SDIRA, an array of new options for protecting your financial future are at your fingertips. You can choose investments that:

Don’t rely on the goodwill of government bureaucrats
Don’t add to the national debt
Don’t drop in value thanks to money-printing year after year
Don’t have a $15,000/year purchase limit

Clearly, someone thinks Americans are better-served by not having these options.

We respectfully disagree. Birch Gold Group specializes in helping American families secure their financial futures by offering them the choice of investing their hard-earned money in physical precious metals.

If you want to learn more, we’ve also created an education page for that, too.

2022, Featured, inflation, retirement savings