(NextAdvisor) - There was a frenzy in our Slack channel at Brunch & Budget when the I Bonds rate was announced in May.
“Did everyone see??? The rate for I Bonds went up to a record 9.62% yesterday,” one of our financial planners said.
“Nice! I knew it was going to go up but not that high,” another planner wrote back.
I ran upstairs to tell my husband and podcast co-host, Dyalekt, and he immediately said, “Let’s buy some I Bonds.” But then immediately added, “Wait, what’s an I Bond?”
I laughed. Right, what’s an I Bond?
An I Bond (or Series I Savings Bond if we want to be official-official) is a government-issued Treasury bond where the interest rate is tied to inflation. That’s what the “I” stands for. This means when inflation is low, the I Bond interest rate is low, and when inflation is higher—as we’re seeing with rising gas, food, and consumer staples prices—the interest rate for the I Bond also goes up.
“OK, but should we buy them?” Dyalekt asked. “What’s the downside?”
What They Don’t Tell You About I Bonds
Here are a few caveats to I Bonds:
- The money is trapped for the first year. With an I Bond, you have to leave the money in the bond for at least one year. You cannot withdraw the money at all within the first year. If that gives you any pause, the I Bond is most likely not for you.
- If you withdraw the bond before five years, you lose the last three months of interest.
- The interest rate changes every six months, and you’re subject to whatever the interest rate is in the next period. This is fine if inflation continues to increase (for your I Bond, not for the rest of your wallet unfortunately!), but there is a risk that interest rate could dramatically decrease while you’re invested.
- They can be pretty difficult to buy, with an outdated website and some complicated rules (more on that later).
- The maximum contribution each year is $10,000. You could get around that cap by buying bonds for different people in your household. That means I could buy bonds up to that amount, my husband could, and we could buy the same amount for our son each calendar year. On the flip side, if you have a much smaller amount to invest, it’s important to ask yourself if it’s worth the hassle. You essentially earn $9.62 for every $100 you invest in an I Bond.
By Pamela Capalad
August 16, 2022
