Jane Young: I Bonds are a great hedge against inflation | Business
Inflation has become a major concern for investors after the annual inflation rate hit 6.8% in November.
The stock market has always been a good hedge against inflation, but most investors keep part of their portfolio in fixed income to protect themselves from fluctuations in the stock market. Returns on fixed income investments have been significantly lower than inflation, with money market accounts and certificates of deposit returning between zero and 0.5%.
Until inflation returns to a more reasonable level, I bonds can be a great option to keep pace with high inflation. Bonds I issued between November 2021 and April 2022 pay an annual rate of 7.12%. I Bonds are securities issued by the U.S. government that pay two components of interest: a fixed rate that stays the same for the life of the bond and a floating rate based on the inflation rate that is adjusted every every six months. The variable rate is based on the consumer price index for all urban consumers (CPI-U). The current fixed rate is zero and the current variable rate is 7.12%.
Bonds I have a 30-year maturity, but you don’t have to hold them to maturity. You have to hold them for at least 12 months, and if you sell them after 12 months but before five years, you lose the last three months of interest. It may sound restrictive, but inflation is unlikely to drop dramatically over the next 12 months. If inflation drops significantly over the next five years, it may be time to sell the bonds, and the loss of three months of interest will have less of an impact.
Due to the required 12 month holding period, I Bonds are not a good option for your emergency fund, which should be easily accessible.
An individual is limited to an electronic purchase of up to $ 10,000 in I Bonds in a calendar year. A couple can electronically purchase a total of $ 20,000 per year. As the end of the year approaches, you can buy $ 10,000 by December 31 and an additional $ 10,000 in January. A couple can buy a total of $ 40,000 in I Bonds by the first week of January. If you receive a tax refund, you can use it to buy an additional $ 5,000 in paper I bonds.
I Bonds can be purchased electronically by creating an account at Treasury Direct, www.treasurydirect.gov. Once the account is created, you can transfer money from your bank account to purchase the bonds.
Interest on I Bonds is compounded semi-annually, and the value of your Bonds increases on the first of each month. Interest is subject to federal tax but not state or local tax. Interest is tax free if used for qualifying education expenses. Interest can be reported to the IRS on an annual basis or when you sell the bonds.
Jane Young, a Certified Paid Financial Planner, can be reached at [email protected]