I Bonds

One of the safest investments on the planet at the present time are investments in U.S. Government debt. The reason they are so safe is because the U.S. Government has never defaulted on its debt — at least not yet. Unfortunately, however, interest rates are at historic lows, which makes the Government’s debt not so attractive.

Luckily, however, there is a little known investment offered by the U.S. Treasury called I Bonds. They are, essentially, a debt instrument (i.e. a bond) that adjusts for inflation every six months. I-Bonds pay a fixed interest rate (presently at 0.00%), plus a rate that is adjusted for current inflation (presently 3.06% — click here for updated information). The rates are adjusted in May and in November of each year, and they are good for the time between each adjustment (i.e. six months in duration).

Though the fixed interest rate currently sits at 0.00%, the average inflation adjusted interest rate should hover around the 3.00% range for the foreseeable future. With real inflation now around 3.00% (and set to rise with the rising costs of oil) I feel fairly confident that the overall interest rate will stay above 3.00% for the next several years. If the unemployment situation does not improve markedly, and if tensions in the Middle East deteriorate any further, we could see inflation spike — dramatically! With such a spike would come higher inflation adjusted interest rates on the I Bonds (provided, of course, the U.S. Government does not default on its debt).

Interest on I Bonds compounds semi-annually, and you can never lose money with I Bonds. The bonds can be redeemed, with no interest payment penalties, any time after five years; or any time after twelve months, with a three month interest payment penalty (i.e. you lose three months worth of interest payments). If used to fund higher education, the interest received may be excluded from Federal income tax. As explained by the good people at Treasury Direct:

Under the Education Savings Bond Program you might be able to completely or partially exclude savings bond interest from Federal income tax. This can occur when you pay qualified higher education expenses at an eligible institution or state tuition plan in the same calendar year you redeem eligible I Bonds and EE Bonds issued January 1990 and later. You aren’t required to indicate that you intend to use the bonds for educational purposes when you buy them, but you must make sure the program’s requirements are met; some apply when you buy the bond(s). See IRS Publication 970 ” Tax Benefits for Education.”

Overall, I Bonds are a fairly decent investment for the very conservative investors among us; and they should be given some consideration by those who wish to invest monies they cannot afford to lose. Personally, I have chosen to invest some of my daughter’s college funds in I Bonds and, given the very low interest rate environment in which we currently live, I will most likely invest more in the near future.

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