High Yield Savings Account – isn’t that an oxymoron these days? Where can a saver go to make a decent return on their savings and keep it liquid? Regular savings accounts pay close to0.8%, while high-yield savings accounts pay1.5% on the high end. This situation is intriguing investors to ask if I-bonds are worth the hassle of owning?
I bonds are US Govt issued bonds that have two components. The first is a fixed interest rate component. Today, that rate is 0.40% since the Federal Reserve keeps interest rates low. The second component is an inflation adjustment rate. Both components are adjusted two times a year, on May 1stand November 1st. The May inflation adjustment occurred recently, which called for a rate of 6.48%. The rate increase made many investors turn their heads and ask themselves if it is worth buying I bonds. Below are a few Pros and Cons of owning I bonds.
PROs:
Safety – A government bond does not have default risk, so there is no worry about getting the principal and interest the bond pays. A risk-free 9.62% is almost unheard of in the investment world. Also, there is no price fluctuation. There is no secondary market to buy and sell I bonds, so the price stays the same.
Interest Rate – At a current rate of 6.89% annually of 3.45% semi-annually, this is much more lucrative than a US Govt Bond, Corporate Bond, CD, or savings account.
Family– Each person can buy I bonds for up to $10,000 in a calendar year. For 2022, a married couple could each buy $10,000, thus investing $20,000 as a family. Then, in January 2022, they could buy $20,000 more. Also, you can purchase I bonds for each child, and if you have a trust, the trust can buy them.
Gifting– An individual can buy them as a gift for other people. Remember, each person has a cap of $10,000 to purchase for themselves or gift to others. Also, the gift can work as another college savings vehicle.
CONs:
Amount– Each individual can only purchase up to $10,000 in a calendar year. If the current inflation and interest rate remain the same until next May, a person will earn $962 on the $10,000 investment. This amount might not seem worth the hassle.
See AlsoTrackinsightMaturity–An investor must hold the bonds for 12 months, and if they sell the bonds before five years, they lose three months of interest. If a person sells the bonds under 12 months, they receive no interest, much like a CD.
Purchasing–There are only two ways to purchase I bonds. The first is setting up an online account withwww.treasurydirect.gov. Then, an individual can buy up to $10,000 in I bonds. The second is to use a citizen’s Federal Income Tax refund and purchase up to $5,000. Technically, a person could buy up to $15,000 in I bonds in a calendar year.
Liquidity– Tying up $10,000 from savings could be a problem using emergency funds. If so, this is probably not a good idea.
I bonds have never been popular due to low interest and low inflation rates. However, inflation has increased, making these safe bonds more attractive. The cap at $10,000 and the annual interest of $689 might not be worth the hassle of owning and keeping up with a separate account. On the other hand, 6.89% is an excellent rate of return for a low-risk government bond. If you would like more information, please reach out Here and we would be glad to walk you through the process.
About The Author
Jordan Benold, CFP®providesfee-only financial planningandinvestment managementservices in Frisco, TX. Benold Financial Planning serves clients as afiduciary and never earns a commission or sells a product. Jordan has over three years of experience as a financial advisor in Frisco.
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