Author Topic: I-Bonds...a great place for idle cash  (Read 2748 times)

Offline ChiKid24

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I-Bonds...a great place for idle cash
« on: October 13, 2021, 10:06:02 AM »
Earlier this year I was made aware of a great place to store a portion of my unneeded cash. I-Bonds. If you haven't heard or looked into them, I highly recommend doing a little research. This "Manifesto" would be a good read:

Here's my overall summary
1) I-Bonds are US government securities that pay an interest rate comprised of a fixed component (set when purchased) and a variable component (fluctuates every 6 months based on inflation for as long as you hold them)

2) Current I-Bonds are paying 3.54% (0% fixed + 3.54% inflation component) and if you purchase them today, you will get that rate for the next six months. After six months, you will get a new rate for six months based on the latest inflation readings. This is expected to be 7.12% starting in November. You rate will continue to adjust every six months based on inflation as long as you hold them.

3) I-Bonds have some great tax advantages in that you do not pay any state income tax on the interest (particular good in a high state tax like California) and Federal income tax is deferred until you redeem them or they mature (20 years). You can potentially also avoid Federal income tax on the interest if you use the bonds to pay for qualified education expenses (subject to income caps)

4) You are limited to maximum of $10,000 in annual purchases per taxpayer, though you can also purchase $10,000 through a trust and can add an additional $5,000 if you overpay your Federal Income tax and choose to receive your refund in the form of I-Bonds. So a married couple could potentially put away $35,000 a year ($10k for each spouse, $10k for a trust, $5k for tax refund) into I-Bonds.

5) All I-Bond purchases must be made and held at Treasury Direct. There are a bunch of complaints about this website and user interface. I admit it's clunky, but manageable with some patience (never hit the back button on your browser lol).

6) Some other negatives is there is a minimum 1-year holding period. So once you purchase, the money is illiquid for one full year. In addition, if you redeem before five years, you will forfeit three months of interest.

Overall I'd say this is a great place to stash cash, especially when CDs and High Yield savings accounts are paying close to nothing. 3.54% interest on government bonds with tax advantages, ramping up to 7.12% next month is very attractive. Put in the added bonus that it's inflation protection and this is a no brainer for part of your emergency fund, if you are one to believe in that concept.

Hope that is helpful!

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