Can someone explain the appeal of I-bonds?

[RedmondStash]

I've seen a few threads about I-bonds, and I've read up about them. At first blush, they look great (7+% return right now, OMG!), but:
- Rate applies only for 6 months, then you're locked into whatever rate is chosen next.
- Rates can be quite low.
- Limit of $10k per person per year.
- Must be purchased directly through US Treasury in a nonretirement account, so all profit is ordinary income (except possibly if it funds a college account?).
- Must hold for 5 years to receive all the interest.

So basically, this looks like excitement over a $350 return on $10k, which isn't so different from what you'd get as bank rewards for transferring accounts around.

Do I-bonds typically have such a high interest rate that it's worth buying them instead of regular bonds, even though the interest is regular income and you have to hold them for 5 years for the full benefit?

What am I missing? What's all the fuss about?

Thanks.

[cool7hand]

posting to follow

[Virtus3]

Following as well. I was debating throwing some of my emergency fund money in I bonds but doesn't seem worth the hassle unless I'm missing something too. Not that it should be the key factor but I've not heard good things about the TreasuaryDirect portal either.

[DeniseNJ]

I got them bc my savings account was offering 0.5% interest.  So I took 10K of my emergency money and put it in I Bonds.  I wouldn't put it all in I bonds at once in case I need some of it in an actual emergency, but having an extra 10K I'm not using earn 7%, seemed like a great idea when the rest of my savings is earning hardly anything but is immediately available.  Even if I didn't get all of it after a year but before 5 yrs, it won't earn me less than half a percent.

For me my stash is 100% in SP 500 and US stock index funds--it's all stock but plenty diverse.  I still have 7 yrs of work left so this is good for me.  The I bond money is just 10K out of my relatively small savings.

[EvenSteven]

The context that most threads have been in is along the lines of "Should I put my emergency funds in I-bonds?"

So with that in mind, maybe a more narrow question could be "are I-bonds better than a savings account?"

Going through your 5 points, and comparing cash to an I-bond, I would say:
1) Locked in for 6 months at a new unknown rate rate, yes. But even if that rate is 0% variable rate (which it won't be), then you are still quite a bit higher on an annualized rate than a savings account. After a year, you aren't really locked into any rate, you can sell at any time and move that cash to any account you want.

2) The rates are quite a bit higher than a savings account, and if at some point in the future that changes, you always have the option to sell the I-bond and go back to a savings account.

3) Yep, but how large of an emergency do you really need? 10K purchase limit, plus 5K of extra tax withholding if you want a little extra, doubled for couples. Add another 10k for trusts or businesses. That is plenty for my emergency fund needs, but your mileage may vary.

4) Savings account and bond fund interest are also taxed at your ordinary marginal rate, so no difference there. I-bonds are state and local tax free, and federal tax deferred, so I would call them the clear winner in tax treatment.

5) The penalty is the last 3 months interest for redemption before 5 years. I would include this penalty when looking at I-bonds and discount their value accordingly. That said, 3 months penalty when comparing rates of 7% vs 0.5% isn't even close.


If you compare them to being able to invest in a total market fund in either a Roth or traditional IRA, they don't look like anything special. But if you have already maxed your tax advantaged accounts, and are looking for a place to put your emergency finds, I think it's a great choice.

[Cadman]

I've seen a few threads about I-bonds, and I've read up about them. At first blush, they look great (7+% return right now, OMG!), but:
- Rate applies only for 6 months, then you're locked into whatever rate is chosen next.
- Rates can be quite low.
- Limit of $10k per person per year.
- Must be purchased directly through US Treasury in a nonretirement account, so all profit is ordinary income (except possibly if it funds a college account?).
- Must hold for 5 years to receive all the interest.

So basically, this looks like excitement over a $350 return on $10k, which isn't so different from what you'd get as bank rewards for transferring accounts around.

Do I-bonds typically have such a high interest rate that it's worth buying them instead of regular bonds, even though the interest is regular income and you have to hold them for 5 years for the full benefit?

What am I missing? What's all the fuss about?

Thanks.

The fuss is that's it's guaranteed money with relative safety. Think of it more like a 12-month* CD- park your money there and forget it. No trying to rack up dozens of monthly transactions with the local bank to get a few percent, no card churning where you have to wait 6 months anyhow for the cash bonus to land (or fight to get it).

Sure, rates can go up or down, but you can wait until the spring when the next rate change is announced and decide if you want to get in or not. The previous rate of 7.12% will still apply for your initial 6 months. I did the same back in November and put in 20k at an avg of ~5%. I'll do it again here in 2022.

The portal looks clunky, but only took a few minutes to create an account and get verified. Pretty easy, actually.

And while you're limited to 10k per SSN, you can also contribute if you have a side gig or business with an EIN.

*12 months is the minimum, which isn't unreasonable IMO. Pull out any time between then and 5 years and the only penalty is 3 months interest. If you're already maxing tax-advantaged accounts, this is a good place to park money that might otherwise be losing out to inflation.

[friedmmj]

I am buying $20k ($10k me and $10k spouse) per year of I-Bonds indefinitely (2022 will be year 3 of that).  A single investment of $10k isn't very significant but 10-15 years of $20k per year will provide a nice inflation mitigation tool for my fixed income allocation in retirement.

[Systems101]

What am I missing? What's all the fuss about?

It depends on the model of markets that you use.  If your model is "stocks return 7% above inflation, bonds are 1-2%, thus for FIRE use stocks", then yes, they kind of look a bit lame.  Downright awful, in fact, if you want a return above inflation because the fixed rate is currently 0%!

Some folks stop there and YOLO it.  That's not wrong, it's simply a choice.

It's a choice based on a variance-serving-as-risk model, however, not a risk-based model.  While the variance needs to dominate (to get the overall return), in the second order, paying some attention to the underlying risks makes sense to me - otherwise, you can end up very concentrated in what LOOKS like diversified assets, but which are not really diversified.  As a bond example, you may buy lots of various local sewer bonds as "safe" bonds, hedging against any one city having a problem, but if every single one of them is newish 30 to 50-year bond in a coastal community, you've just concentrated yourself into "rising ocean risk".  As a stock example, if your international mutual funds/ETFs universally hedge all their currency risk, then even your international portfolio is bearing 100% US currency risk.  Is that desired or an accident?

For me, I view it as a risk transfer exercise.  The federal government takes on inflation risk in exchange for paying me (right now) a 0% fixed rate.  I do take on a "my inflation deviates from CPI-U inflation" risk, but that's much smaller in variance than the overall inflation risk.  Almost all other aspects (counterparty risk, etc.) are identical to other federal bonds, so this is a simple delta to evaluate.

Inflation is a funny thing - predicting it is basically impossible (people try, but if you evaluate their prediction record, they lose to a random walk).  Then again, traditional federal bonds are effectively priced according to predicted inflation.

That means we should think in two pieces: predicted inflation and actual inflation.

Look at 5 different scenarios:

• Predicted inflation is high but actual inflation is low(er)
• Predicted inflation is high and actual inflation is high(er)
• Predicted inflation is low and actual inflation is low(er)
• Predicted inflation is low and actual inflation is high(er)
• Predicted inflation and actual inflation match (note: never happens)

If you look at these scenarios, the 3rd scenario is basically what most people under 35 have experienced in their entire working life.  Anyone under 50 has arguably only experienced scenario 1 transitioning to scenario 3.  That means the variance model above has worked really well, and frankly diversification beyond US stocks hasn't really been valuable.  (This is partially true because scenarios 1 and 3 don't require a company to have strong pricing power, so it's been a long time since we've had pricing power determine winners and losers in the market)

Past performance is no guarantee of future results.

The net is the 5th scenario is no big deal - people raise fear about inflation but in reality you shouldn't be overly scared of inflation - you should be worried about transitioning between the scenarios - because it's the reset of expectations that's a problem!  So it's the transition from where we are today to higher inflation that's painful - not high (and predicted) inflation by itself.  (We simplify this as high inflation = bad, just like we simplify risk = variance, but knowing that's just a simplification can be important)

It's the transition into scenarios 2 and 4 ... or a stable presence of scenario 4 (transitory inflation, anyone?) ... where transferring inflation risk to the federal government is valuable.  Considering that we have been in scenario 3 for some time (20 years?), does it make sense to hedge against a transition and if so, what's the most likely state?  IMHO, state 1 will only be reached through state 2 or state 4 as many folks are anchored in low expectations and it will need to be proven otherwise.  So the most likely transitions from today are into scenario 2 or scenario 4 - exactly where I-Bonds help...

Are bonds overall a small part of the portfolio since variance/return dominates?  Absolutely.  Is a block of my cash in I-bonds?  Absolutely.  Do I hold any other bonds?  Only a small amount purchased in the '08 financial crisis.

Note: The above statements assume you're US-based.  If not, the timing of the scenarios are almost certainly different and different rules apply.

[Jack0Life]

The most simplest way to explain it is it's way better than any any 15 month CD.
Show me any bank that's offering 2.85% for a 15 month CD right now. Of course 2.85% is based on the worst case scenario. 6 months @ 7.12% 6 months later @ 0% and forgoing 3 more months to pull the money out.
My math may not be exactly accurate but basically you keep the I Bonds for 15 months and you're guaranteed 7.12% for the first 6 months assuming the next 6 months is at 0%. And if you've seen inflation lately, the next 6 months is NOT going to be 0%.
Also there were people buying before end of Oct that were locked into ~5.xx% for 12 months.
Me and my wife got $10k each a month ago and in Jan, we will buy $10k more. That's $40k @7.12% for 6 months. I'm assuming the next 6 month the rates will be relatively high. Not a bad way to diversify the portfolio.

[SteadyStache]

And while you're limited to 10k per SSN, you can also contribute if you have a side gig or business with an EIN.

If purchasing for business, what happens when the entity closes? I read somewhere that the bond transfers to a primary owner, but can't find literature to support this. I've contacted support and waiting to hear back.

[friedmmj]

And while you're limited to 10k per SSN, you can also contribute if you have a side gig or business with an EIN.

If purchasing for business, what happens when the entity closes? I read somewhere that the bond transfers to a primary owner, but can't find literature to support this. I've contacted support and waiting to hear back.

Businesses cannot own I-Bonds.  Only individuals or trusts that are owned beneficially by individuals can.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm#who

[RedmondStash]

OP here -- okay, I get it now.

I was thinking of I-bonds as replacing part of a bond allocation; it sounds like instead, folks use it to replace part of a cash allocation. From that perspective, it does make a lot of sense. Better rates than a savings account, guaranteed, even if you don't know from one 6-month period to the next what the rate will be.

Thanks, everyone.

[Virtus3]

And while you're limited to 10k per SSN, you can also contribute if you have a side gig or business with an EIN.

If purchasing for business, what happens when the entity closes? I read somewhere that the bond transfers to a primary owner, but can't find literature to support this. I've contacted support and waiting to hear back.

Businesses cannot own I-Bonds.  Only individuals or trusts that are owned beneficially by individuals can.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm#who

That's incorrect. https://thefinancebuff.com/buy-i-bonds-business-sole-proprietor-llc.html

[friedmmj]

And while you're limited to 10k per SSN, you can also contribute if you have a side gig or business with an EIN.

If purchasing for business, what happens when the entity closes? I read somewhere that the bond transfers to a primary owner, but can't find literature to support this. I've contacted support and waiting to hear back.

Businesses cannot own I-Bonds.  Only individuals or trusts that are owned beneficially by individuals can.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm#who

That's incorrect. https://thefinancebuff.com/buy-i-bonds-business-sole-proprietor-llc.html

I stand corrected!  I was misreading the TD verbiage which listed separate rules for TD held vs paper bonds.

[Jack0Life]

OP here -- okay, I get it now.

I was thinking of I-bonds as replacing part of a bond allocation; it sounds like instead, folks use it to replace part of a cash allocation. From that perspective, it does make a lot of sense. Better rates than a savings account, guaranteed, even if you don't know from one 6-month period to the next what the rate will be.

Thanks, everyone.

Yup. Guaranteed money that's better than anything out there right now.

[SteadyStache]

If purchasing for business, what happens when the entity closes? I read somewhere that the bond transfers to a primary owner, but can't find literature to support this. I've contacted support and waiting to hear back.

Okay, support responded with "The bonds will need to be redeemed on transferred." I assume on=or.

[Roland of Gilead]

10k sounds like small money but if you are married and just now buying in December, you can buy again in January so that is $40k

$40k at 7.12% is $2,848.  Suddenly not quite such small money.   And what if the rate doesn't go to zero in six months but instead goes to 8%?  A bank CD isn't going to give you upside to inflation like the I-bond will.

[SteadyStache]

10k sounds like small money but if you are married and just now buying in December, you can buy again in January so that is $40k

$40k at 7.12% is $2,848.  Suddenly not quite such small money.   And what if the rate doesn't go to zero in six months but instead goes to 8%?  A bank CD isn't going to give you upside to inflation like the I-bond will.

I'll be buying 20 for each of us, and 20 for business. 60K in 2 months. Considering buying for children as well.

[Arbitrage]

They replace/are part of my bond allocation.  I have had a mix of inflation-protected bonds (includes TIPS and I bonds) for many years.  If you compare I bonds to the marketable replacements, TIPS, I bonds are clearly superior right now, especially in taxable (no duration risk, zero real rate instead of negative, tax deferred growth, etc).  Obviously, both TIPS and I bonds are currently doing better than nominal bonds.  That won't always be the case, but it's times like these that the inflation protection is for.

[seattlecyclone]

They replace/are part of my bond allocation.  I have had a mix of inflation-protected bonds (includes TIPS and I bonds) for many years.  If you compare I bonds to the marketable replacements, TIPS, I bonds are clearly superior right now, especially in taxable (no duration risk, zero real rate instead of negative, tax deferred growth, etc).  Obviously, both TIPS and I bonds are currently doing better than nominal bonds.  That won't always be the case, but it's times like these that the inflation protection is for.

Same here. I've been buying these for years to form part of our bond allocation.

[RedmondStash]

10k sounds like small money but if you are married and just now buying in December, you can buy again in January so that is $40k

$40k at 7.12% is $2,848.  Suddenly not quite such small money.   And what if the rate doesn't go to zero in six months but instead goes to 8%?  A bank CD isn't going to give you upside to inflation like the I-bond will.

I do take your point, but the 7.12% rate only holds for 6 months, so you're talking about $1,424, not $2,848, for that $40k investment. Yes, the rate could go up, but it could also go down, and you're locked in either way. I think I read in a comment in another thread that the 7.12% rate comes after some extremely low previous rates.

But I can still see how using I-bonds for part of a cash allocation could be beneficial, or even as part of a bond allocation that may react differently to market conditions than a total bond market index fund.

[Roland of Gilead]

10k sounds like small money but if you are married and just now buying in December, you can buy again in January so that is $40k

$40k at 7.12% is $2,848.  Suddenly not quite such small money.   And what if the rate doesn't go to zero in six months but instead goes to 8%?  A bank CD isn't going to give you upside to inflation like the I-bond will.

I do take your point, but the 7.12% rate only holds for 6 months, so you're talking about $1,424, not $2,848, for that $40k investment. Yes, the rate could go up, but it could also go down, and you're locked in either way. I think I read in a comment in another thread that the 7.12% rate comes after some extremely low previous rates.

But I can still see how using I-bonds for part of a cash allocation could be beneficial, or even as part of a bond allocation that may react differently to market conditions than a total bond market index fund.

Ok, but what about comparing it to a CD?  The best 1 year CD rate right now is about 0.85%, which is only $340 vs $1424 or maybe $2,848 or higher.

If you cash out the I-bond earlier than 5 years, you lose the last three months of interest, but if the interest rate was zero, as in the $1424 example, then you could cash it out for no cost and it would be exactly the same as the 12 month CD, except it earned 418% more money.   If the rate stayed the same at 7.12% for the second six months, you would lose half of that if you cashed it out after one year, so your total return would be $2136 (still vs the CD earning $340).  That means the I-bond earned 628% more than the CD.

[friedmmj]

Anyone who is holding bonds as part of a long term asset allocation should consider I-Bonds a no-brainer, end of story.

[Loren Ver]

Thank you for posting this OP!  And thank you those that answered this in a way that actually made good sense.  Framing it in a "replace cash or emergency fund" really helped my poor brain connect the dots.

I'm actually going to buy bonds.  Will wonders never cease?!?!  Going to buy DH and mine today and in January do it again. 

We were all stocks with a little cash.  Since retiring the stocks started dropping cash (the market has been crazy).  Now that cash has somewhere to go since we don't want to put it right back into stocks!  Hurray!

Loren

[TomTX]

I've seen a few threads about I-bonds, and I've read up about them. At first blush, they look great (7+% return right now, OMG!), but:
- Rate applies only for 6 months, then you're locked into whatever rate is chosen next.
- Rates can be quite low.
- Limit of $10k per person per year.
- Must be purchased directly through US Treasury in a nonretirement account, so all profit is ordinary income (except possibly if it funds a college account?).
- Must hold for 5 years to receive all the interest.

So basically, this looks like excitement over a $350 return on $10k, which isn't so different from what you'd get as bank rewards for transferring accounts around.

Do I-bonds typically have such a high interest rate that it's worth buying them instead of regular bonds, even though the interest is regular income and you have to hold them for 5 years for the full benefit?

What am I missing? What's all the fuss about?

Thanks.

With inflation continuing to accelerate, it's quite likely the next 6 month period will have even higher returns. Let's be mildly pessimistic and presume it's the same, and you sell after 1 year, taking the 3 month penalty.

With a $10k I-bond after a year, you get $534
With a $10k savings account, you get $50

Now let's take a ridiculously pessimistic view. At 6 months you go to 0%  interest. "Losing" 3 months of 0% interest is irrelevant. You still pocket $357 after a year. Far better than a savings account.

Can bank account incentives get you more? Quite possibly - with more effort as well. There's also a limit on how many are actually worth doing.

[Jack0Life]

I've seen a few threads about I-bonds, and I've read up about them. At first blush, they look great (7+% return right now, OMG!), but:
- Rate applies only for 6 months, then you're locked into whatever rate is chosen next.
- Rates can be quite low.
- Limit of $10k per person per year.
- Must be purchased directly through US Treasury in a nonretirement account, so all profit is ordinary income (except possibly if it funds a college account?).
- Must hold for 5 years to receive all the interest.

So basically, this looks like excitement over a $350 return on $10k, which isn't so different from what you'd get as bank rewards for transferring accounts around.

Do I-bonds typically have such a high interest rate that it's worth buying them instead of regular bonds, even though the interest is regular income and you have to hold them for 5 years for the full benefit?

What am I missing? What's all the fuss about?

Thanks.

With inflation continuing to accelerate, it's quite likely the next 6 month period will have even higher returns. Let's be mildly pessimistic and presume it's the same, and you sell after 1 year, taking the 3 month penalty.

With a $10k I-bond after a year, you get $534
With a $10k savings account, you get $50

Now let's take a ridiculously pessimistic view. At 6 months you go to 0%  interest. "Losing" 3 months of 0% interest is irrelevant. You still pocket $357 after a year. Far better than a savings account.

Can bank account incentives get you more? Quite possibly - with more effort as well. There's also a limit on how many are actually worth doing.

I'm curious if scenario where the next 6 months is 0%. If you do take it out after 1 year, will the penalty be "the actual last 3 months" or "3 months of average returns".

[seattlecyclone]

It's the actual last three months.

[American GenX]

I've seen a few threads about I-bonds, and I've read up about them. At first blush, they look great (7+% return right now, OMG!), but:
- Rate applies only for 6 months, then you're locked into whatever rate is chosen next.
- Rates can be quite low.
- Limit of $10k per person per year.
- Must be purchased directly through US Treasury in a nonretirement account, so all profit is ordinary income (except possibly if it funds a college account?).
- Must hold for 5 years to receive all the interest.

So basically, this looks like excitement over a $350 return on $10k, which isn't so different from what you'd get as bank rewards for transferring accounts around.

Do I-bonds typically have such a high interest rate that it's worth buying them instead of regular bonds, even though the interest is regular income and you have to hold them for 5 years for the full benefit?

What am I missing? What's all the fuss about?

Thanks.

With inflation continuing to accelerate, it's quite likely the next 6 month period will have even higher returns. Let's be mildly pessimistic and presume it's the same, and you sell after 1 year, taking the 3 month penalty.

With a $10k I-bond after a year, you get $534
With a $10k savings account, you get $50

Now let's take a ridiculously pessimistic view. At 6 months you go to 0%  interest. "Losing" 3 months of 0% interest is irrelevant. You still pocket $357 after a year. Far better than a savings account.

Can bank account incentives get you more? Quite possibly - with more effort as well. There's also a limit on how many are actually worth doing.

I'm curious if scenario where the next 6 months is 0%. If you do take it out after 1 year, will the penalty be "the actual last 3 months" or "3 months of average returns".

LOL.  Where did you even come up with that one?

[Jack0Life]

I've seen a few threads about I-bonds, and I've read up about them. At first blush, they look great (7+% return right now, OMG!), but:
- Rate applies only for 6 months, then you're locked into whatever rate is chosen next.
- Rates can be quite low.
- Limit of $10k per person per year.
- Must be purchased directly through US Treasury in a nonretirement account, so all profit is ordinary income (except possibly if it funds a college account?).
- Must hold for 5 years to receive all the interest.

So basically, this looks like excitement over a $350 return on $10k, which isn't so different from what you'd get as bank rewards for transferring accounts around.

Do I-bonds typically have such a high interest rate that it's worth buying them instead of regular bonds, even though the interest is regular income and you have to hold them for 5 years for the full benefit?

What am I missing? What's all the fuss about?

Thanks.

With inflation continuing to accelerate, it's quite likely the next 6 month period will have even higher returns. Let's be mildly pessimistic and presume it's the same, and you sell after 1 year, taking the 3 month penalty.

With a $10k I-bond after a year, you get $534
With a $10k savings account, you get $50

Now let's take a ridiculously pessimistic view. At 6 months you go to 0%  interest. "Losing" 3 months of 0% interest is irrelevant. You still pocket $357 after a year. Far better than a savings account.

Can bank account incentives get you more? Quite possibly - with more effort as well. There's also a limit on how many are actually worth doing.

I'm curious if scenario where the next 6 months is 0%. If you do take it out after 1 year, will the penalty be "the actual last 3 months" or "3 months of average returns".

LOL.  Where did you even come up with that one?

Why would that be funny ??
If the next 6 months is 0%, and there really is no "3 months penalty", why wouldn't the FED institute a 3 month penalty of some kind of "average return" instead of the actual.
You act like it's an absurd question.

[Roland of Gilead]

I mean maybe that makes sense but that is not the way they do it.  On the other hand, why should there be a penalty for taking out money that is earning 0%?

[Jack0Life]

I mean maybe that makes sense but that is not the way they do it.  On the other hand, why should there be a penalty for taking out money that is earning 0%?

Yeah it was just a question.
The above poster act like it was an absurd question to ask.
Instituting a 3 month penalty rule is just that, a penalty. If the rate is 0% and you get to pull out 3 months early without losing anything is not a penalty. I would say a 0% is not a penalty. It's what whatever is the inflation rate is they calculated for that period.
Again, thank you for the answer but it was a legit question to ask.

[clifp]

I just bought $10K iBonds for the first time in 20 years. 
The ibonds I bought back in 2000-2001 had fixed rate of 3-3.4% plus inflation over 20 years they've more than tripled in value.

A couple other nice features about iBonds is that interest is deferred until redeem, so certainly one of those things you can use to fund early years in retirement before Social Security and RMDs kick in.

They also have a little known feature, if you cash in saving bonds (i or EE) you can completely eliminate any taxes due, if the proceeds are used to pay for educational expenses for you, your spouse or you dependents. So I viewed them as a more flexible educational IRA.  I even used it for myself despite not having spouse, or kids. I bought  certified financial planner course and redeemed EE bonds to pay for it.

[RedmondStash]

A couple other nice features about iBonds is that interest is deferred until redeem, so certainly one of those things you can use to fund early years in retirement before Social Security and RMDs kick in.

I read a comment in another forum that talked about how because interest (and tax thereon) is deferred until redemption, iBonds sort of function like an IRA retirement account. That helps solidify my understanding of iBonds and how they could fit into my investment strategy.

Okay, I'm sold. :)

Thanks, everyone.

P.S. I just passed the 1000-post mark, woo!

[SYNACK]

10k sounds like small money but if you are married and just now buying in December, you can buy again in January so that is $40k

$40k at 7.12% is $2,848.  Suddenly not quite such small money.   And what if the rate doesn't go to zero in six months but instead goes to 8%?  A bank CD isn't going to give you upside to inflation like the I-bond will.

That is exactly what I'm doing ($20 in Dec and another $20k in Jan). Also it is state tax free which is a bonus.

[Loren Ver]

I did the double purchase, Dec and Jan.  Now the free floating cash is a far more reasonable amount.

No state taxes and deferred interest are nice.  I'm a bit learn by doing so I'll see how this goes.  The learning curve might be a little long since we should essentially never need the money.   

Loren

[mtnrider]

Obligatory link to the Bogleheads wiki on I Bonds.  Very useful reference.

Others have said it well, but I'll just say that it's a better cash.  It's taxed less, keeps up with inflation, and is safe. 

[Hall11235]

Not saying anything new here, just seconding I-bonds as cash replacement option.

DW and I are using Ibonds to save up cash for a house down-payment. They allow us a multi-year savings timeline without being overly concerned about inflation eating away at cash sitting in a bank for 3 years. :)

[iluvzbeach]

Question regarding the $10K purchase limit per person, per year.  Let's assume that DH buys 10K in I Bonds, with me as a joint owner, then I buy 10K in I Bonds with him as the joint owner.  Can we then purchase 10K more in I Bonds in our revocable living trust that has his SSN as the TIN, effectively allowing us to purchase up to 30K per year in I Bonds?  I think we can, but want to confirm from others who might have experience doing this.  I've read some different things online and am not 100% clear.

We don't have children to purchase in their names and we aren't interested in buying any I Bonds as gifts for other people.  Just looking to buy as much as we can under our names and the revocable living trust, if possible.

Thanks in advance for weighing in.

[Mr. Green]

People are excited right now because the next 6-month rate cycle is already known, based on March 2022 CPI data. An I Bond purchased before the end of April will earn 7.1% interest for the first 6 months and 9.6% for the second 6 months. So the first year averages an interest rate of over 8%. After that will depend on the November 2022 rate reset but it's pretty safe to say inflation isn't going back to zero in 6 months.

Also worth mentioning is the ability to gift "future" bonds that start earning interest now. For example, my wife and I just yesterday purchased our 10k I Bond limit for the year. However we can also gift each other I Bonds by purchasing them for one another. We can make that purchase right now and the juice starts flowing but the bond stays in each of our "gift boxes" at TreasuryDirect. Come January 1, we can complete the transfer to each other to satisfy the 10k limit for 2023. Since the bonds have been earning interest that whole time, the lock up period for the "2023" bonds isn't any longer than the 10k we each just purchased for this year. So that's 40k in I Bonds we could buy right now with a guaranteed 8+% return over 15 months (extending for the 3 month interest penalty). That's the best guaranteed return I've seen in a looooong time.

[PDXTabs]

I think that people already covered it, but I have an i-bond that I bought in the May 2019 time-frame that has a fixed rate of 0.5% plus whatever the current inflation rate is. Meanwhile I have $10k sitting in my Ally online savings account earning 0.5% total. Thanks Jay Powell!

But yea, my investment portfolio is 100% equities. I view them as a cash replacement.

[boarder42]

I have access to cheap margin at my brokerage account. Could also open a 0% interest credit card to fund it. Guaranteed 6% after I chop the first 3 months interest over the next year is likely far higher than my margin interest will change so I can get a risk free 800 or so dollars after margin costs.

People around these parts hang dry clothes to save a nickel. This is almost no effort to make 800 bucks for me and that should fund my dryer and then some for the year.

[TomTX]

People are excited right now because the next 6-month rate cycle is already known, based on March 2022 CPI data. An I Bond purchased before the end of April will earn 7.1% interest for the first 6 months and 9.6% for the second 6 months. So the first year averages an interest rate of over 8%. After that will depend on the November 2022 rate reset but it's pretty safe to say inflation isn't going back to zero in 6 months.

Also worth mentioning is the ability to gift "future" bonds that start earning interest now. For example, my wife and I just yesterday purchased our 10k I Bond limit for the year. However we can also gift each other I Bonds by purchasing them for one another. We can make that purchase right now and the juice starts flowing but the bond stays in each of our "gift boxes" at TreasuryDirect. Come January 1, we can complete the transfer to each other to satisfy the 10k limit for 2023. Since the bonds have been earning interest that whole time, the lock up period for the "2023" bonds isn't any longer than the 10k we each just purchased for this year. So that's 40k in I Bonds we could buy right now with a guaranteed 8+% return over 15 months (extending for the 3 month interest penalty). That's the best guaranteed return I've seen in a looooong time.

That's... really interesting.

[mistymoney]

I have access to cheap margin at my brokerage account. Could also open a 0% interest credit card to fund it. Guaranteed 6% after I chop the first 3 months interest over the next year is likely far higher than my margin interest will change so I can get a risk free 800 or so dollars after margin costs.

People around these parts hang dry clothes to save a nickel. This is almost no effort to make 800 bucks for me and that should fund my dryer and then some for the year.

lol!

[iluvzbeach]

For those interested, there's a ton of great info on this bogleheads thread: https://www.bogleheads.org/forum/viewtopic.php?t=346091

I got my answer about the trust and we've now purchased 30K in I Bonds (his/hers/trust) for which we'll get the 7.12% rate for the first six months and then the 9.62% rate for the next six months.  While it's not a ton of money in the grand scheme of things, it's way better than these funds are currently earning in our FDIC-insured savings account.  The bonds are a part of our overall "cash" in our asset allocation.

I may next look to see if we can bump it up another 20K by each purchasing a 10K gift for the other and not transfer it to DH/DW until 2023.  Like Mr. Green said, this will ensure we take advantage of these super-high rates for the next 12 months.  I expect inflation will continue to rise, but I'd be surprised if it continues to increase at the levels we've just seen.