“Did everyone see??? The rate for I Bonds went up to a record 9.62% yesterday,” one of our financial planners said.
“Nice! I knew it was going to go up but not that high,” another planner wrote back.
I ran upstairs to tell my husband and podcast co-host, Dyalekt, and he immediately said, “Let’s buy some I Bonds.” But then immediately added, “Wait, what’s an I Bond?”
I laughed. Right, what’s an I Bond?
An I Bond (or Series I Savings Bond if we want to be official-official) is a government-issued Treasury bond where the interest rate is tied to inflation. That’s what the “I” stands for. This means when inflation is low, the I Bond interest rate is low, and when inflation is higher—as we’re seeing with rising gas, food, and consumer staples prices—the interest rate for the I Bond also goes up.
“OK, but should we buy them?” Dyalekt asked. “What’s the downside?”
What They Don’t Tell You About I Bonds
Here are a few caveats to I Bonds:
- The money is trapped for the first year. With an I Bond, you have to leave the money in the bond for at least one year. You cannot withdraw the money at all within the first year. If that gives you any pause, the I Bond is most likely not for you.
- If you withdraw the bond before five years, you lose the last three months of interest.
- The interest rate changes every six months, and you’re subject to whatever the interest rate is in the next period. This is fine if inflation continues to increase (for your I Bond, not for the rest of your wallet unfortunately!), but there is a risk that interest rate could dramatically decrease while you’re invested.
- They can be pretty difficult to buy, with an outdated website and some complicated rules (more on that later).
- The maximum contribution each year is $10,000. You could get around that cap by buying bonds for different people in your household. That means I could buy bonds up to that amount, my husband could, and we could buy the same amount for our son each calendar year. On the flip side, if you have a much smaller amount to invest, it’s important to ask yourself if it’s worth the hassle. You essentially earn $9.62 for every $100 you invest in an I Bond.
I Bonds are at historically high interest rates right now, but don’t let the hype sway you from your current investment strategy, like investing in index funds, if it doesn’t ultimately make sense for you.
When Is an I Bond Most Likely a Yes?
A great reason to buy an I Bond is if you have a savings goal you’re trying to achieve within 1-5 years, like buying a home, taking a big vacation, planning a wedding, or sending someone to college. There is no risk that you will lose money in the bond, only the interest you earn on the bond.
When Is an I Bond a Maybe?
If you’re someone who has an established savings cushion around the recommended 3-6 months’ worth of living expenses, you could consider putting a portion of your savings cushion in an I Bond to supercharge your interest earnings. If $10,000 is all or most of your savings, make sure to have your emergency fund set aside in cash savings first and purchase a lower bond amount.
The thing to ask yourself is how nervous you would be tying up this amount of money for a year or more. Some of our clients didn’t like the idea of having to take an extra, potentially cumbersome, step to access their savings.
When Is an I Bond Most Likely a No?
If your financial goals, like retirement, are 10 or more years away, it most likely makes more sense to stick to your long-term investment plan. In general, bonds are used to reduce the risk in an investment portfolio because bonds are less volatile than stocks, but they also have lower long-term gains than stocks. If retirement is a long way away for you, you’re better off keeping your money invested in low-cost index funds.
Don’t Make Our Mistake
If you do decide to buy I Bonds, first you need to know the website is really old and outdated. Dyalekt and I set aside about 30-45 minutes to navigate the website, which required my driver’s license number and multiple check-your-email-again moments.
“So pretty much, the website sucks,” I laughed.
Once we got in, we excitedly purchased three I Bonds, one for every family member.
The next day, I got two emails saying:
“Your purchase exceeds the annual savings bond purchase limitation. Please be advised the limit is $10,000 per series and TIN per calendar year. A refund of the excess purchase will be made to the bank account where the purchase originated. You should receive your refund approximately 8 to 10 weeks [emphasis mine, because WTH] from the date of purchase.”
What did we do wrong??
Our big mistake was we had tried to buy all the I-Bonds under my login because there was an “Add New Registration” button front and center on the website that allowed us to enter different Social Security numbers for different people. Don’t do that. Turns out “Add New Registration” didn’t mean what we thought it meant.
Also, if you want to buy an I Bond for a minor, you have to go through a whole other process where you click on the ManageDirect tab and then click on “Establish a minor linked account.”
Now we have to wait another 8-10 weeks before we can buy the bonds again. Even as a financial planner who has seen tons of financial websites, it wasn’t as easy as I thought.
Before you get distracted by the shiny interest rate like we did, think about how an I Bond fits into your overall financial plan. It’s a bit of a pain. And there’s a good chance you’ll do just fine without one.