The I Bond’s High Interest Rate Is About to Expire

Government bonds; Series I bonds and Series EE bonds. (Jonathan Weiss/ShutterStock)

The clock is running out on I bond’s record-high interest rate. As of Nov. 1, 2022, the current rate of 9.62 percent will drop. But you'll need to purchase I bonds by Oct. 28 to take advantage of the current rate.

Released by the Treasury Department and backed by the federal government, Series I Savings Bonds provide a rate of return based on inflation. They’re a safe way to hedge against a volatile economy that protects your nest egg. But how do I bonds work, and what happens when the rate drops?

How I Bonds Work

I bonds earn monthly interest. The interest is compounded semiannually. This means that the bond interest rate, in this case, 9.62 percent, is applied to a new principal every six months. The new principal is the sum of the interest earned and the prior principal.

The I bond can earn interest for 30 years or until you cash it.

I bonds come as an electronic bond or a paper bond. You can only purchase paper I bonds with your tax refund. Electronic bonds are purchased through a Treasury Direct account.

Interest Rate Changes Semiannually

Interest rates change every six months, on Nov. 1 and May 1. Although you must hold the bond for 12 months, you only know the interest rate for the first six months. When you purchase a bond, you must be aware that your principal will earn different interest rates. For example, if you purchase an I bond by Oct. 28, for the first six months your interest rate will be 9.62 percent.

The interest you bought the I bond at for the first six months is based on the issue date. Even if the interest rate changes during the first six months, you keep your original interest rate for the six months.

But as of Nov. 1, the new interest rate will be 6.48 percent. So that means after your first six months of owning the I bond, your interest rate will drop. But considering that even 6.48 percent is the second highest the interest rate has been in the last five years, it’s still a positive investment.

Why Purchase I Bonds

Guarding against inflation is the number-one reason to purchase I bonds. In fact, the “I” in I bonds stands for inflation. They protect your principal from eroding away from inflation.

In the past, bonds were not a great investment when inflation was running high. This is because high inflation had a negative impact on the future value at maturity.

With I bonds, the interest rates are based on the Consumer Price Index. So, for example, if inflation is running at 8 percent, the bond rate is set slightly above that.

You’re only locked into an I bond for the first year. So, if you find other investments’ interest rates running higher, you can sell your I bond and move your money.

Additional Benefits to I Bonds

The biggest plus is that it protects your money against inflation. Your principal and interest are guaranteed not to lose money. They don’t even have a negative return in deflationary times. And you don’t have to commit too much, because you can buy in increments from $25 to $10,000 annually.

Finally, there are a couple of tax benefits. First, I bonds are not taxed if used for higher education. So, when that newborn is brought home, you can start saving safely through I bonds for college.

I bonds are also exempt from state and local taxes.

Downside to Investing in I Bonds

There are always cons to any investment, and I bonds are no exception. First, you’re not going to make fast money. Second, I bonds aren’t a quick turnaround. They are a long-term investment, and you must keep your money tied up for a year to earn interest. If you pull it out before 12 months, you don’t earn any interest.

You can’t purchase I bonds through your custodial online investment account or local bank. Instead, you must open an account with Treasury Direct.

You won’t receive income; the interest is just added to the principal, and you don’t receive statements. You'll have to log onto your Treasury Direct account to view your money.

You’re limited as to how much money you can invest. The maximum investment yearly is $10,000. And finally, your yield is taxed as ordinary income.

Stock Market vs. I Bonds

When the bear is running, I bonds look attractive to diversify a portfolio. I bonds have a reliable return and are a safe long-term investment.

The current 9.62 percent is close to traditional stock market results. Stock market returns can run around 10 percent. With I bonds, you can avoid the current volatility of the stock market while still making a good return.

And although there’s no financial crystal ball, the stock market doesn’t look like it will settle down in the foreseeable future. So you might want to consider tweaking your portfolio and diversifying with I bonds. Ask your financial advisor if this is a good long-term plan for your financial situation.

Taking Advantage of the I Bond’s Interest Rate

Although I bonds don’t have negative returns, they have rarely paid more than 4 percent since 2008. With I bonds at 9.62 percent until Oct. 28, there’s an opportunity to diversify a portfolio or start saving for those future college expenses.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.