What are Treasury I-Bonds and Do I Need Them in My Portfolio?

What are Treasury I-Bonds and Do I Need Them in My Portfolio?

With inflation at record highs this year, investors are looking for ways to keep up. We thought it might make sense to discuss whether treasury I-Bonds really help mitigate the effects of inflation.

What Are Treasury I-Bonds?

Treasury I-bonds are a type of U.S. savings bond issued by the U.S. Treasury and are designed to protect your money from losing value due to inflation. The interest is paid semi-annually and is composed of a fixed rate and a variable rate. The fixed rate remains the same for the life of the bond, and the variable rate is adjusted every six months to keep pace with rising prices.

They are backed by the full faith of the U.S government and are one of the safest bond options available. You can buy them directly via the Treasury Direct website and every individual can buy up to $10,000 in treasury I-bonds per year. You can also use up to $5,000 of your tax refund to buy treasury I-bonds for a total of $15,000 as an individual, or $25,000 for a married couple. They are not marketable, meaning you can’t buy or sell them like you do other securities.

Treasury I-bonds mature in 30 years, unless you cash them in sooner. You must hold them for at least a year after purchase and redemptions are not allowed during that period. Similar to investing in a CD or other bond, your money is locked down for a certain period of time. If you choose to cash the I-bond in after the one year minimum but prior to five years, you will lose out on the previous three months of accrued interest.

Essentially, Treasury I-bonds are a safe place to store cash that you may not need for a while.

What’s the Catch?

At the end of the day, there is no free lunch. Below are some of the potential drawbacks to I-bonds.

  • You can only invest $10,000 per person per year and potentially $15,000 maximum if you have a tax refund and elect via Form 8888 to get part of it in paper I-bonds when you submit your tax return. A married couple could invest up to $25,000 per year ($10K per spouse plus $5K of a refund). Other types of entities can also purchase I-bonds, such as LLCs, corporations, sole proprietorships, and living trusts, but the limit is still $10,000 per entity.
  • Buying I-bonds on the Treasury Direct website can be a little tricky. It’s not the easiest of websites to navigate.
  • The money is not super liquid, since you have no way to access it for at least a year. Thus, any cash you invest in I-bonds should be in excess of an emergency fund (3-6 months of expenses in a liquid bank account)
  • Over the long-term, exposure to the stock market is a better hedge against inflation for your overall portfolio, as previously explained by advisor Vanessa McElwrath in her blog Inflation Nation.
  • If you are carrying any debt with an interest rate above 6%, you may want to pass on I bonds and use excess cash to pay down that other debt. I-bond rates typically drop over time, while your debt interest rate will not.

    In What Circumstance Would I-Bonds Make Sense?

    A Child’s Education Fund

    Parents or even grandparents can invest up to the annual limit ($10,000) for each child. The parent will have to create a Treasury Direct custodial account for the child and then make the purchase. This money counts as a gift, and thus must be used for the child’s benefit.

    Short-Term Savings Goals

    If you plan to buy a new car in the next few years, I-bonds could also make sense. Of course, always consult your financial advisor, who can help you compare rates of interest on CD’s, Treasuries, High Yield savings accounts, money market funds, and other options to help you find the best place to park your savings.

    About Author

    Kira Scott, CFP®

    Kira joined ML&R Wealth Management in February 2020, bringing with her over 20 years of experience in the financial services industry. She has a passion for developing client relationships by delivering world-class service and assisting with the client’s long-term planning and day-to-day needs associated with the wealth management process.

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