I-bonds are paying 7% (yes, really). Should you buy to fight inflation?


Question: I’ve seen how I-bonds are offering a 7% return. Is this something you would recommend investing in?

A We’ve been in a low interest rate environment for so long that people likely forgot government I-bonds even existed (by the way, the “I” stands for “inflation”). But there’s definitely been renewed interest over the last few weeks, particularly since the Treasury Department just announced the investment will earn 7.12 % over the next six months (that’s not a typo!).

And given the average one-year certificate of deposit is only earning 0.14 % right now, according to Bankrate, this seems like a no-brainer investment. But you should know a little bit more about I-bonds before you dive in.

The basics: The Treasury Department created 30-year I-bonds in 1998 as a tool investors could use to hedge against inflation (as consumer prices rise, so do I-bond rates). This current 7.12 % rate is the second-highest in their history, and, come May 1, the Treasury Department will announce a new rate (which could be higher or lower) based on the latest Consumer Price Index. 

But I-bonds come with some drawbacks.

First, you cannot buy more than $10,000 worth of digital I-bonds per year (there’s a $5,000 annual limit for paper I-bonds, which can only be purchased using your federal income tax refund).

Second, they’re not liquid – meaning you can’t access your money at any time, unless you want to pay a penalty.

Third, their structure is a bit complicated (they’re comprised of two different interest rates).

And fourth, you can only buy and redeem I-bonds through the Treasury’s website.

On the plus side, they’re not taxed on the state or local level, and their value can never go below zero.

Here’s The Simply Money Point: I-bonds are making a lot of headlines these days, and with good reason. And they could be something to consider adding to your investment mix, especially if you’re extremely risk averse. But whether you do so should really depend on your needs, goals and what you’re already invested in. As always, we recommend speaking with a fiduciary financial adviser before making any final decisions.


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