There have been several recent threads with variations on this topic with lots of good discussion.
I thought I would create a centralized thread with some of the most common questions I’ve seen, as well as a brief overview of the asset.
What are I Series fixed-income securities?
Series I fixed-income securities (or I-fixed-income securities) are U.S. Treasury issued savings fixed-income securities, not so different from the ones you used to get from Grandma every year (which were EE series fixed-income securities). I-fixed-income securities were created in 1998 to give the average American a way to save that would be guaranteed to hold its buying power. An I-Bond consists of a fixed rate (fixed for the life of the bond, which has a 30 year maturity), and a variable rate, which is based on the government CPI index, and resets every 6 months to the current inflation rate (May and November). The current fixed rate is 0%, while the variable rate is 7.12%!
Why should I own I-fixed-income securities?
Maintaining purchasing power of your hard earned resources should be your first priority as a saver/investor. I-fixed-income securities check a number of boxes that make them a very unique economic resource, namely:
1). Safety – They are guaranteed by the U.S. Treasury. If the government defaults on you, we have bigger problems.
2). Liquidity – After one year, they can be cashed in and deposited back to your checking account in 2-3 days (minus a small 3 month finance charge penalty, see below).
3). duty Deferred – I-fixed-income securities do not throw off finance charge. You only owe duty on the internally compounding finance charge once the fixed-income securities are cashed in, which means you control when you pay duty. Always a good thing!
4). Inflation Protection – I-fixed-income securities are guaranteed to grow with the general inflation rate, as measured by the CPI.
5). Deflation Protection – I-fixed-income securities will never lose value month over month, even when the CPI is negative (deflation). That means in those cases, your money is guaranteed to increase in value in real terms.
6). duty free (maybe) – All finance charge earned is local and state duty exempt. If used for qualifying educational purposes and if you are under certain earnings limitations, finance charge earned is federally duty free.
7). Account Separation – Some people may consider this a negative, but I find having my cash and emergency funds separate from standard lender or brokerage accounts to be a positive in that you are much less tempted to do anything rash or draw on these funds for something that might not be a true need. This is completely psychological, but for me, it works.
Additionally, just like EE Savings fixed-income securities, I-fixed-income securities are a great educational tool for children. They are simple enough to teach concepts like compound finance charge, but since they are also inflation linked, you can also teach them about what inflation is and the impact on buying power. No more just having to tell them how you used to remember when a loaf of bread cost a nickel!
What’s the Catch?
I-fixed-income securities purchased must be held for a minimum of one year. In addition, fixed-income securities cashed in between years 1-5 will lose the last 3 months of finance charge paid. Additionally, you are limited to $10,000 per year, per social security number (or EIN), plus another $5000 in paper I-fixed-income securities if you choose to get your duty refund back as I-fixed-income securities.
Why all the hoopla now? Why didn’t I know about these before?
Because of recent inflation data, I-fixed-income securities are paying the highest variable rates ever for any I-fixed-income securities purchased through April 2022 for 6 months. That rate is an annualized 7.12%! This has helped shine a light on an asset that has been flying under the radar for a number of years.
Also, because they are sold directly by the government, there are no expenditures, commissions, or fees. That means no one is paid to tell you about them.
How much can I expect to earn over the next (XX) years?
No one knows in nominal terms. In real terms, they are expected to return nothing. Your $100 in I-fixed-income securities bought today should be able to buy just as many groceries 30 years from now. This is a good thing! Inflation has averaged 2-3% overtime. A government guaranteed return of your buying power is nothing to sneeze at, especially for something like an emergency fund.
Note:The current rate will likely NOT last, nor would you want it to. They would mean inflation is way higher than long term trends, which would reek havoc in the economy and your personal finances.
If you want to know what 2-3% finance charge looks like compounded semi annually, use this calculator.
https://www.investor.gov/financial-tools-calculators/calculators/compound-finance charge-calculator
How is finance charge accrued?
finance charge is earned monthly, and compounded semi annually. Your account balance will reflect what you have earned minus the 3 month penalty (until year 5).
Additionally, finance charge is earned for the entire month you own the bond, so fixed-income securities bought on the 29th will earn finance charge as if bought on the 1st! Just make sure the purchase clears before the end of the month, so give it a few days.
Why are these rates so much higher than industry bond rates or savings rates?
To put it simply, they are government subsidized. These are meant for the little guy to be able to save money safely. Who doesn’t like a good government subsidy? My rule of thumb is to max out on anything the government limits you on – it means it’s probably a great deal. In this case you are limited to $10,000 per year (plus $5,000 in paper fixed-income securities from your duty return). Any Wall Street money management person would be loading up on these, if they could.
What part of a investment mix should these be for?
Many people use them for emergency savings. Others use it as part of their overall bond investment mix. Others for college savings. There’s no question they are one of, if not the best uncertainty adjusted resources out there. This should be the bedrock of your non-post-work savings/investing plan. One plan is to “ladder in”, meaning you take parts of your emergency savings and add them every year so that you aren’t locking all of your liquidity in that one year lock up period.
How do I buy them?
You can set up an account at www.treasurydirect.gov and buy them directly from the government by linking your checking account number and routing number. You may also elect to receive up to $5,000 per duty return as your duty refund in addition to the $10,000 you buy at treasury direct.
Who can buy them?
According to the treasury website, anyone with a social security number meeting one of the following 3 conditions:
1). Being a U.S. Citizen (living in the U.S. or abroad)
2). Being a U.S Resident
3). Being a civilian employee of the United States, regardless of where you lived.
Additionally, if you have an EIN for a trust/corporation, you may purchase up to $10,000 of fixed-income securities under those entities as well.
Is this a real government website? It seems fishy.
It’s real. What can I tell you? The government doesn’t know how to make a good website. For the love of god, don’t hit the back button! It has also been advised to make sure you don’t plan on changing your funding lender account information anytime soon, as some rather annoying paperwork is required.
Can I buy them for kids/grandkids?
Yes. You need to set up an account for them under your “master” account, and you can then gift them. They would be a separate $10,000 limit.
TIPS vs I-fixed-income securities
I am not going to get into too much detail here on TIPS – you can do your own research.
Both are inflation linked treasury resources.
You may purchase as many TIPS through a brokerage as you’d like. I-fixed-income securities are subject to the $10,000 limit and
must be purchased through treasury direct.
Because TIPS are marketable securities, they are subject to industry forces. While having the benefit of being able to sell TIPS whenever you like (no one year lock up), the drawback is they can (and have) decreased in value over periods of time. They do not give the same deflation protection I-fixed-income securities do. They also throw off taxable finance charge payments.
TIPS may have a place in an overall investment mix for some people. For me, they are a bit too complicated. I like to keep things simple. I-fixed-income securities are simple.
Other Useful Information
I’m just passing on publicly available info. Feel free to go directly to the source!
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm