Education On I Bonds

Higher inflation has been in the headlines non-stop recently and it has become a problem for all of us. It is likely to remain much higher than normal for an extended period of time. Many people have an emergency fund or a large cash account set aside for various reasons that gain very little interest at current market rates offered by banks, and it can be frustrating to watch a large cash account gain little value over time. U.S. Treasury I Bonds can be a partial remedy to this problem because the current rates pay a whopping 9.62%!

The current rate of 9.62% is composed of a fixed rate & an adjusted inflation rate that are both adjusted semiannually based on market conditions. Since inflation has spiked upwards, the I Bond inflation rate has increased dramatically also. I Bonds earn interest monthly and compound semiannually, and the bonds pay interest for 30 years. This is a very good rate, but there are some limitations. Each taxpayer can open an account and invest $10,000 per year, and with a parent or other adult’s help a child can open an account also. For adults, an extra $5,000 can be invested in paper I Bonds if the funds come from the tax refund. So, a couple could invest a total of $30,000 per year into a Treasury Direct I Bond account ($15,000 per person).

Funds used to purchase I Bonds will be locked up for 12 months upon initial purchase, so if you have short term liquidity needs you must be aware of this fact. After the 1-year lockup period, you can redeem each I Bond, but you will forfeit 3 months of interest. After 5 years, there is no penalty for cashing in the bonds.

I Bonds are exempt from taxation by any state or political subdivision of a state except for estate or inheritance taxes. Interest earnings are subject to federal income tax at ordinary income tax rates; however, if you are using the earnings to pay for education, then there is no federal income tax. I Bonds are a very good alternative for financing future education expenses for those who wish to avoid the volatility of the market.

I Bond accounts, for one owner registrations, act like an IRA or 401k retirement account where you can select a beneficiary to avoid the probate process upon the owner’s death. It is a good idea to select a beneficiary because this person would have access to the funds much faster than waiting for the probate process to conclude.

Most people have 3-6 months of household expenses set aside in an emergency fund that is rarely used. Or, perhaps you have a cash account earmarked for an expense a few years down the road, and you wish to avoid market volatility. Placing some of these funds into an I Bond account through the Treasury Direct Website may be a good alternative to preserve the value of your savings. For more information, please visit the following website: