High Yield Savings Account – isn’t that an oxymoron these days? Where can a saver go to make a decent return on their savings and keep it liquid? Regular savings accounts pay close to 0.8%, while high-yield savings accounts pay 1.5% on the high end. This situation is intriguing investors to ask if I-bonds are worth the hassle of owning?
I bonds are US Govt issued bonds that have two components. The first is a fixed interest rate component. Today, that rate is 0.40% since the Federal Reserve keeps interest rates low. The second component is an inflation adjustment rate. Both components are adjusted two times a year, on May 1st and November 1st. The May inflation adjustment occurred recently, which called for a rate of 6.48%. The rate increase made many investors turn their heads and ask themselves if it is worth buying I bonds. Below are a few Pros and Cons of owning I bonds.
Safety – A government bond does not have default risk, so there is no worry about getting the principal and interest the bond pays. A risk-free 9.62% is almost unheard of in the investment world. Also, there is no price fluctuation. There is no secondary market to buy and sell I bonds, so the price stays the same.
Interest Rate – At a current rate of 6.89% annually of 3.45% semi-annually, this is much more lucrative than a US Govt Bond, Corporate Bond, CD, or savings account.
Family – Each person can buy I bonds for up to $10,000 in a calendar year. For 2022, a married couple could each buy $10,000, thus investing $20,000 as a family. Then, in January 2022, they could buy $20,000 more. Also, you can purchase I bonds for each child, and if you have a trust, the trust can buy them.
Gifting – An individual can buy them as a gift for other people. Remember, each person has a cap of $10,000 to purchase for themselves or gift to others. Also, the gift can work as another college savings vehicle.
Amount – Each individual can only purchase up to $10,000 in a calendar year. If the current inflation and interest rate remain the same until next May, a person will earn $962 on the $10,000 investment. This amount might not seem worth the hassle.
Maturity – An investor must hold the bonds for 12 months, and if they sell the bonds before five years, they lose three months of interest. If a person sells the bonds under 12 months, they receive no interest, much like a CD.
Purchasing – There are only two ways to purchase I bonds. The first is setting up an online account with www.treasurydirect.gov. Then, an individual can buy up to $10,000 in I bonds. The second is to use a citizen’s Federal Income Tax refund and purchase up to $5,000. Technically, a person could buy up to $15,000 in I bonds in a calendar year.
Liquidity – Tying up $10,000 from savings could be a problem using emergency funds. If so, this is probably not a good idea.
I bonds have never been popular due to low interest and low inflation rates. However, inflation has increased, making these safe bonds more attractive. The cap at $10,000 and the annual interest of $689 might not be worth the hassle of owning and keeping up with a separate account. On the other hand, 6.89% is an excellent rate of return for a low-risk government bond. If you would like more information, please reach out Here and we would be glad to walk you through the process.
About The Author
Jordan Benold, CFP® provides fee-only financial planning and investment management services in Frisco, TX. Benold Financial Planning serves clients as a fiduciary and never earns a commission or sells a product. Jordan has over three years of experience as a financial advisor in Frisco.