I-Bond is offering an interest rate of 6.89% until April 30, at which point interest rates may drop below 4%. Before that, some may feel the need to jump on the I Bond bandwagon. But even with higher interest rates, are bonds worth it? I Due to the way bond rates are calculated, certain penalties, and variable interest rates that may fall, your returns may be lower than advertised. You might.
Why I-Bonds Are Attractive During High Inflation
i bond Helps protect your savings from inflation By paying an interest rate designed to match the current rate of inflation. The I-Bond interest rate is actually a combination of two different interest rates: a fixed rate and an inflation rate. The fixed interest rate remains the same, but the inflation rate changes twice a year.
According to the U.S. Treasury Department, the I-Bond’s fixed interest rate combined with the inflation rate creates a compound interest rate. This is the rate the I bond actually earns. This is technically correct, but if you bought the I-bond now, your take-home pay could be less than 6.89%.
Important things to know about I bonds
I-bonds must be held for at least one year, according to TreasuryDirect, a government-run website where you can buy I-bonds. If sold within five years, bondholders must pay a penalty equal to the last three months’ interest.
Then there are two types of I-Bonds, paper and electronic. Paper I bonds are difficult to purchase because they can only be purchased by mail when filing a federal income tax return. Paper I Notes have a minimum purchase amount of $50 and a maximum purchase amount of $5,000 per calendar year. Electronic I-Bonds can be purchased online. The minimum purchase amount is $25 and the maximum is $10,000.
Finally, I Bonds, like most investments, are subject to tax. These taxes include federal income taxes (excluding state or local income taxes), federal estate taxes, gift taxes, sales taxes, and state estate or inheritance taxes.
Can you really earn 6.89% interest?
If someone buys $10,000 worth of electronic I-bonds in April 2023, they can expect to earn 6.89% of $10,000, or $689, in one year. But I-bonds are much more complicated than that.
Since this rate is annual, a $10,000 I bond is actually guaranteed $344.50 in interest over the next six months.
But a six-month take can feel irrelevant because you can’t even cash out a bond until you hold it for a year. Since the interest rate on I bonds is only guaranteed for six months, we only know half of the equations needed to calculate how much these bonds could pay him in one year.
To quell curiosity, let’s imagine that the 6.89% interest rate drops to 3.79% in the second six months, as some experts predict. Add the first 6 months of interest ($344.50) to your original investment of $10,000 as a new principal. Over the next 6 months, you will earn 3.79% interest on that new total of $10,344.50. This accrues approximately $196.50 in additional interest over the second six months, for a total of approximately $541 in interest over the one year period.
You can cash the bond after one year, but if you cash before you hold it for five years, you’ll lose the last three months’ worth of interest. This is approximately $98, or $443 in net interest after one year. With the money he keeps in bonds for five years, he can keep the total minus the unpaid taxes.
I Bonds vs High Yield Savings Accounts vs Stocks
Making a profit equivalent to 4.4% over the year may seem tempting, especially given the relative safety of I-bonds. But if that’s the return you’re after , there may be other options to consider. High-yield online savings accounts currently pay about 4.5%. Its interest rate is similar to that of I-bonds, but savings accounts do not have any requirements on how long the money is locked. If you are willing to take more risks, invest in the stock market through: index fund Or mutual funds generally earn higher average returns over the long term. Historically, the stock market average annual return is around 10%.
For many investors, especially those with years to retire, I-bonds may not be the best choice. If you plan to hold I bonds for a long time, it may be more profitable to put the same money into the stock market. investment return calculator Estimate what stock-based returns can bring.
Who am I a good bond for?
If you already have an emergency fund and a well-diversified investment portfolio, an I-Bond could be under investigation. These can be especially useful if you have one goal for a specific time period, especially at least five years. For example, say you’re saving for a home down payment and don’t want to risk your money on the stock market. However, a high-yield savings account can earn the same amount of interest with less hassle, and the stock market can offer higher long-term returns.