Thanks to higher inflation rates and stock market volatility, Series I savings bonds (I bonds) are currently a hot topic. Everyone’s understandably looking to make sure their money is saved and invested wisely.

 If you feel like your dollars are languishing in your traditional checking and savings accounts, you’re not alone. And perhaps the dollars in these accounts could be put to better use. It all depends on your overall financial situation.

 I bonds, which are linked to inflation rates, sound like a vehicle in which everyone should invest. When we dive in, however, and look at their pros and cons, there may be better options.

What Are I Bonds?

 I bonds are inflation-linked savings bonds issued by the U.S. government. These bonds earn interest based on combining a fixed rate (set when the bonds are purchased) and an adjustable inflation rate.

 The interest rate on I bonds is adjusted twice a year based on changes in the level of inflation as measured by the Consumer Price Index for All Urban Consumers (CPI-U). An I bond accrues interest for 6 months, and then its rate resets.

Why I Bonds Can Be a Good Investment

 In addition to their current attractive interest rate, I bonds are backed by the U.S government and hence have very low default risk. I bonds are generally considered one of the safest investments because of their government backing.

 Stock and bond markets have both posted negative returns thus far into 2022. So, the interest rate on I bonds isn’t looking too bad. This has caught the attention of many investors.

 Since the cost of food, gas and other goods has exponentially increased over the past two years, the purchasing power of any cash in your checking and savings has drastically diminished. An I-bond can hedge your risk against rising inflation and help you maintain purchasing power.

 You’ll also experience tax benefits when investing in an I bond. You don’t pay taxes on the interest earned until you redeem the bond. I-bonds have the added benefit of avoiding state and local income taxes. Finally, if you use the funds for education expenses, you may be able to avoid paying federal taxes on the interest.

The Downside of I Bonds

There are a few drawbacks to investing in I bonds. The first is liquidity constraints: your money is tied-up. You must hold an I-bond for at least one full calendar year. In addition, if you redeem your bond within the first 5 years of purchase, you will lose the last 3 months’ worth of interest.  

While current stock market trends are lackluster, stocks have significantly outperformed I bonds when you look at returns over longer time periods. Investors who still have time on their side will most likely see better returns on their diversified portfolios. Five, ten and fifteen years down the line, the growth in your 401k, IRA, or HSA will most likely outpace the return of I bonds. For individuals who can stomach market volatility and are interested in building wealth, I bonds might not be the best investment choice over the long haul.

Because its interest rate resets every 6 months, the interest rate on an I bond may decline materially well before the 5-year holding period elapses. Meanwhile, your money isn’t accessible (without penalty or tax consequences), and you’re missing out on potentially better long-term returns in your diversified portfolio.

Are I Bonds a Good Investment?

A better question to ask is, “Are I bonds a good investment for me?” Like nearly all investments, the answer depends on your personal situation.

If you have excess cash and have already funded your retirement accounts (e.g., 401(k), IRA, HSA) for the year, an I bond may make sense. It may also make sense for someone who would be uncomfortable taking on additional stock market risk.

However, if your goal is to build wealth over the long-term, then investing in stocks or other growth assets may lead to a better outcome.

I bonds may have a place in your overall portfolio, but the only true way to know is to consider your specific situation and goals.

Contact us today in Downers Grove, IL or from anywhere across the country to learn more.

Disclosures:

This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.