With the exception of the I bond, there haven’t been many safe-haven investments that can beat inflation, but even this safety net can’t fight inflation any time soon.
The record high 9.62% interest rate on I bonds issued by October will fall in November. Between 1 and 6.48%, significantly lower, but still one of the best investments, experts say.
The exchange rate change is based on the change in the consumer price index (CPI) between March and September. The new rate is below Annual inflation of 8.2% in Septemberthat is, when the rate is adjusted for inflation, you’re looking at a negative interest rate.
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What are I bonds and how do they work?
It’s a 30-year Treasury bond that protects you from inflation. It pays both a fixed interest rate and a rate that fluctuates twice a year with inflation.
Interest is compounded semi-annually, meaning every 6 months a new interest rate is applied to the new principal equal to the previous principal plus the interest earned in the last 6 months. The value of the bond increases because it earns interest and the principal value grows.
You can get $10,000 from the Treasury and another $5,000 using a tax refund. You can cash them out after 12 months, but if you do it in less than 5 years, you lose your last 3 months of interest.
Do you pay taxes on I bonds?
You must pay federal income tax, but there are no state or local taxes on I bonds. You can either report each year’s earnings or wait to report all earnings when you cash the bond.
If you use the money for qualified higher education expenses, you may not owe taxes on the earnings.
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Why is the variable rate falling when inflation is still high?
The variable interest rate on the I bond is based on inflation changes over the past 6 months. In this case, the exchange rate is determined in November. It will be based on inflation from March 1 to September.
“July and August slowed down This resulted in lower inflation,” said Ken Tumin, founder of depositaccounts.com, a bank account comparison website.
CPI for July Compared to June and August, it increased by 0.1%. In September, the monthly CPI accelerated again by 0.4%.
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What is a fixed ratio and does it ever change?
The annual fixed rate is announced on May 1 and November every year. 1 for all I bonds issued in the next 6 months and remains at that rate for the life of the bond. It has been at 0% since November. 1, 2019.
Treasury can narrow the gap between them inflation rate and I close the interest rate by increasing the fixed interest part in November. 1, but this is unlikely to make real or inflation-adjusted returns positive. If the Treasury raises its fixed rate, it will be by a very small increase (think one-tenth of a percentage point).
The last time it was above 1% was in November. 1, 2007.
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Is the I bond still a good investment?
Yes, because other similar quality investments, including savings accounts, treasury bills and certificates of deposit (CDs), offer even lower returns.
Online savings accounts offer a little more than 3% interest and CDs offer about 4% interest, “and those are the best, not the average,” Tumin said. Treasury bills yield below 5%.
Plus, keep in mind that the current 9.62% rate still applies to all bonds purchased through October. 31. These bonds will earn 9.62% for six months, then move to 6.48% in the next six months. That would make the one-year return about 8.05%, still not bad.
Or “maybe inflation will be below 9.62% in the next 6 months, and then below 6.5% in the next 6 months,” Tumin said. “If that happens, you’re going to get real productivity gains for next year.”
Also, they never lose money because the current interest rate cannot fall below zero and the purchase price cannot decrease.
“Treasuries will always convert an I bond to its face value if the investor has held the security for 12 months,” Morningstar vice president of research John Rekenthaler said in a note last month. “Effectively, I bonds have a maturity date that the investor wants.”
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When is the best time to buy an I bond?
Buy I bonds through October to own a record 9.62% rate for six months. 31. In November, you will earn full interest for October as well. 1, Tumin said.
To be on the safe side, buy a little early as the Treasury will take a few days to process your purchase.
“I want you to make sure that the purchase is made no later than the second and last business day of the month,” he said. “Be sure to get your I bonds for this month no later than Friday, October. 28.”
This tip is that if you already have an account set up with a bank account approved by the Treasury, I noted. Otherwise, give yourself more time to shop.
In general, “it’s best to buy I Bonds near the end of the month and redeem them at the beginning of the month to get maximum returns,” he said.
Medora Lee is a money, markets and personal finance reporter for USA TODAY. You can reach him at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
