You can earn a return of 7.12% which is indexed to inflation. Also, returns aren't subject to local taxes. And the bonds are backed by the "full faith and credit" of the United States government.
The biggest hurdle here is that any single account holder can only buy $10,000 worth of I-bonds per calendar year. However, you can also buy up to $5,000 with your tax refund, meaning you can total $15,000.
You buy I-bonds directly through the U.S. Treasury at treasurydirect.gov.
But to ensure they make sense for you, let's walk through all the details...
The interest on bonds is recalculated every six months. The rate is a combination of a fixed rate plus an inflation rate based on the Consumer Price Index ("CPI"). You will earn the headline rate for six months, it will be recalculated, and you'll earn that for the next six months.
If inflation turns negative, the bonds can yield zero, but they never have negative rates.
Interest earned is added to the principal value for the next six months, so you will see the benefits of compound growth.
These are intended as long-term holdings. You cannot redeem your bonds for 12 months. After that, if you redeem within five years, you will forfeit the last three months of interest you collected. After five years, you pay no penalties and can hold for a total of 30 years.
Tax situations are highly personalized, but in general there is no state or local income tax on interest earned. Federal income tax is due, but it's possible in some instances to avoid that by using the bonds to pay for education.
Today's bond starts with a fixed rate of zero, given the prevailing low rates of the day. The annual rate is currently 7.12%.
Of course, if inflation or interest rates pick up, I-bonds can pay much more
To buy I-bonds, you need to set up an account at treasurydirect.gov. You buy them directly from Uncle Sam. There are no fees.
When you create a TreasuryDirect account to buy I-bonds, it’s important to add what’s known as a beneficiary designation, naming who inherits the assets if you pass away.
Without this designation, it becomes more challenging for loved ones to collect the I-bonds and may require the time and expense of going through probate court, depending on the I-bond amount.
With a named beneficiary, I-bond heirs can continue holding the asset, cash it in or have it reissued in their name, according to Treasury Direct.
The accrued interest up to the date of death can be added to the original owner’s final tax return or the heir’s filing. Either way, the beneficiary can decide whether to keep deferring interest or not.
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