There are obviously a lot of drawbacks with inflation. It can be a tough time for investors when expenses go up and the value of the dollar essentially goes down. One method the U.S. Treasury Department is battling inflation is by offering tax-deferred Series I bonds that offer very little risk. I bonds can be a great investment option during this inflation period.
You are able to buy Series I bonds that will pay 9.62%—tax-deferred—with no downside risk. There is also no state or local income taxes required when you cash in these bonds. The 9.62% rate is guaranteed for six months. After that period, the Treasury Department will:
Here’s an example of how I bond investment works. You purchase $10,000 of Series I bonds on September 24. You earn 9.62% for six months for a total of $481 ($10,000 x 9.62% divided by 2). On March 24, 2023, your principal balance is $10,481.
Now, let’s say the Treasury sets the new interest rate at 9.0% on November 1. During the six months after March 24, you will earn interest at 9% on the new principal balance of $10,481. After a full year, you will have $10,953 in your TreasuryDirect I bond account.
Here are the key advantages of Series I bonds:
As you can see, there is a lot to like about Series I bonds. There isn’t much to dislike other than the initial investment you will need to make. Keep in mind you can use your business entities, trusts, gifts, and even your living trust to make purchases of I bonds and create a much higher limit than $10,000. With the gifting strategy, you can have more than one gift box per done, so you have opportunity there, too.
The biggest advantage of I bonds is that there is no downside risk. Your total balance can never go below its latest redemption value because the interest rate will never go below zero.
That said, you will want to keep your eye on the interest rate when it is updated. The Federal Reserve is aiming to lower inflation back down to a standard 2% rate. That may not happen soon, but it could happen in the future. That could mean the guaranteed I bond rate could drop. It can never go below 0%, but it could go down to a point where the investment is no longer worth your time. You may consider this a shorter-term investment of 1-5 years simply because of the inflation rate that is currently so high and will be for at least the near future.
For now, it’s a guaranteed 9.62% gain over the next six months that is risk-free and offers tax-deferred interest earnings. That sounds pretty great when so many other investments are much riskier during this steep inflation period.
To learn more about Series I bonds and other investment planning options to hedge against inflation, contact Illumination Wealth today and schedule an introductory financial consultation.