CRISTINA OSMENA: Why you should buy I-bonds
I am feeling sheepish today talking about an idea of where to put your money. I have written about money matters before in this column (typically because that is what I’m filling my head with that week). My motivation is different this time. I have been trying to tell everyone I know. Yet, it didn’t occur to me until now that I could broadcast this idea to my community.
Very rarely does an investment come along that is so compelling, it’s practically a no brainer. The least attractive thing about I-bonds right now is that an individual can only buy $10,000 of them every calendar year. Here’s the good part: the bonds on offer right now pay 9.62%. That is an annualized rate that resets every six months. Yes, that is better than junk bonds, better than corporate bonds. And it’s a treasury bond! That means the US government will redeem it when you go to redeem it (after 12 months and hopefully within 30 years) with US dollars. The risks related to US dollars are not zero. In fact, I am obsessed with this topic and can share a list of podcasts and one economist in particular (Saifdean Ammous) that I love on this subject.
But if you are ok with taking on the risk of owning US Treasuries and denominating your investments in dollars, and you probably are if you are reading this, you need to put what you can in I-bonds.
You can buy them through treasurydirect.gov. You will need to open an account if you don’t already have one. Physical/paper bonds are no longer a thing at least with I-bonds, not in terms of new issuance. Keep all the passwords and identity phrases in a safe place because there are so many of them. An individual can only buy $10,000 worth per year. These bonds are so popular that they put that on the home page of the website. But it will be close to October when this column is published and next year is around the corner. So you will soon be able to own $20,000 when you buy some more next year. If you are married, your spouse counts as a separate individuals, no matter how seamless is your union. That makes $40,000 for the two of you by January. If you have kids, you can gift them I-bonds as well.
The reason they are paying so much is that the interest on this treasury savings bond is determined by formula. Half the formula is dependent on a fixed rate that will stay the same throughout the life of the bond. This is typically a fraction of the federal funds rate. The other part of the interest rate changes every six months. It is tied to inflation. That is why the current I-Bond is paying 9.62% and probably why the next reset will also be some amazingly high number.
The interest on the I-bond is taxable at the federal level but not the state level. Interest is tax exempt if you are using the proceeds to pay for college and you (as a couple) made less than $154,000.
