Here’s an investment choice you’ve likely never heard of. Why? Because no one can sell them to you. No one has a reason to advertise them to you. It is between you and the federal government on this one.
And, they’re “boring.” Not going to get instantly wealthy over these guys. You’re not going to watch a ticker during your work day and speed your heart up. But they are a compelling piece to have in your portfolio.
I-Bonds are a flavor of US Savings Bonds. It is debt. You are loaning the federal government money.
Here’s some attributes of I-Bonds:
- They are inflation adjusted. Inflation goes up, you get a higher return, which helps you contain some inflation risk.
- I-Bonds have a fixed and variable component. The fixed part is determined when you buy the bond, and they vary for different 6 month periods they are sold. The variable part is determine from the CPI (Consumer Price Index), a measure of inflation. Something to note is that the fixed rate is not an absolute. If the CPI indicates negative inflation, that is subtracted from the fixed rate. The good news is it can never go below zero, so once you earn money, you can’t lose it.
- They are backed by the full faith and credit of the US government. If that’s a concern for you, maybe gold would be a better investment for you. (I’m being a little sarcastic…in my opinion, gold is a rock that doesn’t create additional value. As you will!)
- They do not float in the market and so cannot lose value. It’s been you and the government. When you’re ready to sell, they cash you out. There is no middle man.
- You can buy a maximum of $10,000 per year.
- You cannot withdraw the first year.
- If you need to withdraw your month between 1-5 years, you lose 3 months interest.
- Tax deferred. You can also avoid federal tax altogether if the proceeds are used to pay for higher education.
- They stop accruing interest after 30 years
- You can only buy and sell electronically through the TreasuryDirect® website. Your account can be linked to your checking account.
- Compounded semi-annually.
- They are tax deductible if the proceeds are used for education.
- There are no costs. There is not up front transaction fee, there is no expense ratio.
Having said all that, the interest rate has not usually been real high. But they are very close to no risk at all, and do make income. They are very safe. They are tax deferred.
Being tax deferred, they are a viable instrument if you’ve maxed out 401k’s, Roth’s, and IRA’s (lucky you!) and are looking for another vehicle to put money in to.
I-Bonds are worth a look as a portion of the bond portion of your portfolio. They are a unique investment that you are unlikely to hear much about.