Rising inflation may increase yearly rates for I bonds. Here’s what to know

Advisors

RyanJLane | E+ | Getty Images

If you’re rattled by soaring prices, I bonds, a popular inflation-protected and nearly risk-free asset, may soon become even more appealing, experts say.

While I bonds currently pay 7.12% annual returns through April, that rate may jump to 9.62% in May, according to Ken Tumin, founder and editor of Depositaccounts.com, who tracks these assets.

I bond returns have two parts: a fixed rate and a variable rate, changing every six months based on the Consumer Price Index.

The next change, linked to March data, will reflect an 8.5% growth in annual inflation, the latest numbers released by the U.S. Department of Labor on Tuesday.

More from Your Money Your Future:

Of course, the 9.62% rate is an estimate. The U.S. Department of the Treasury will officially announce I bond rates for the next six months on May 2, Tumin said. This chart shows the history of both rates.

However, purchasing I bonds in April offers a unique “12-month view” of earnings, he said. If you buy in April, you’ll lock in 7.12% annual returns for six months, followed by an estimated 9.62% rate for another six months.

Backed by the federal government, I bonds are a relatively safe portfolio option because the value doesn’t decline and rates won’t ever drop below zero.  

“The main ‘gotcha,’ though, is that you’re limited in terms of how much you can invest,” Tumin said.

You may purchase $10,000 per calendar year, plus an extra $5,000 in paper bonds through your tax refund. However, individuals may buy more through separate tax IDs for businesses, trusts or estates. 

Another downside is the lack of flexibility, making I bonds less attractive for emergency savings you may need to access in a pinch.  

“You absolutely cannot access it for a year,” said certified financial planner Tricia Rosen, principal at Access Financial Planning in Andover, Massachusetts. “It doesn’t matter how badly you need it or what horrible situation you’re in.”

Moreover, if you cash in I bonds within five years, you’ll lose the previous three months of interest, she said.   

The benefits of I bonds are really coming into play.
Ken Tumin
Founder and editor of Depositaccounts.com

Still, selling I bonds after one year and giving up three months of interest may be more lucrative than a savings account or one-year certificate of deposit, Tumin said.

Savings accounts and one-year CD rates at the largest retail banks are currently averaging 0.06% and 0.15%, respectively.

“The benefits of I bonds are really coming into play,” he added, explaining how there haven’t been other periods of high inflation since the Treasury introduced I bonds in 1998.

Articles You May Like

Top Wall Street analysts stand by these stocks as the first half of 2022 wraps up
Olive Garden’s parent company Darden beats earnings estimates as sales jump
70% of retirees would tell their younger selves to start saving earlier
Pending home sales post surprise increase in May, likely due to brief pullback in mortgage rates
Health insurance premiums poised to jump next year for 13 million people unless Congress extends expanded subsidies for marketplace coverage