Headline: Inflate your returns.

Date: 4/24/2022

Body:  Any conversations I have about the stock market and investments with people 5-10 years my senior, they all convulse any time they see one of “their” stocks go down for a day.    So far as I know, I have a much longer time horizon, so, I try not to worry, and find deals on mis-priced stocks as a market tanks.    But, it did make me think about investments bearing a decent return, that might not be in the stock market.  I found 2 possibilities that are interesting, and both offered by the government.  They are the I bonds and the EE bonds.

What is an I bond?

No, it is not a bond in the debt of Apple.    I bonds are U.S. savings bond, engineered to conserve the investment from inflation.   This seems pretty relevant right now, doesn’t it?  According to one financial professional, “Today’s I bond yield far surpasses that of any other government-guaranteed interest rate available from any bank, brokerage or other insured source,” says Steven Jon Kaplan, CEO at True Contrarian Investments in Kearny, N.J.  The reason I bonds are attractive to me  is that recently, they were receiving 7% interest, and that is with very little risk.    (Sorry, this is getting kind of sexy, should have warned you.)  Also, they seem to be a favorite of some people at the John C. Bogle School for Financial Literacy, so this is a fine distinction.

Ok, these seem to be a good deal, but, I’m waiting for the other boot to drop.

I bonds are a pretty good deal, in many instances.   The interest rate is adjusted on a monthly basis, and they are exempt from state and local taxes.  On the other hand, you can only purchase up to $15,000 per year ($10, 000 from your personal account and up to $5,000 of your tax refund.)  Further, you must own the I bond for a minimum of 5 years to receive all interest, and if sold after only one year, your sales price will be docked for 3 months of interest.  During that 1 year, your funds seem to be absolutely locked up.  Remember also, that you don’t receive interest payments over time.  Interest earned is added to the principal of the bond, and you receive this value when you sell it. 

You must own the bond for at least five years to receive all of the interest that is due. You cannot cash out an I bond before holding it for a year; if you do so after that point (but before five years), you forfeit three months of interest.  All of these are forgivable, but it is incumbent upon the owner to keep track of all administrative details, as 1099-INT statements are not generated.   So, be careful to guard your password carefully, and keep your own records of your purchases.  (Please let your heirs know where to obtain these records also.)

They say that timing is everything…

This is very true with respect to I-bonds.   For simplicity, I will present the time periods in a table:

Time PeriodComment
The whole first year of ownership.Your money is pretty much locked up.
Years 2-5You can get money out but, you sacrifice 3 months of interest.
In 20 yearsAfter 5 years, you can sell the security without penalty,  up until the 20-year maturity date.
In 30 yearsThis is an extended maturity period.

Taxes are a large part of this.

Because I bonds are a U.S. Treasury security, they are not taxed by the state or municipal governments.  Revenue earned is taxed at the federal level, but if used to pay for education expenses, it could be federally income tax free too.

So, what’s this other character?

The other type of savings bond from the federal government is the EE bond.   These two types of securities are very similar, with only a few key differences.   Those differences might be very important to you, so, I summarized the relationship between these two securities in the chart below.

I BondsEE BondsComment
Sold at face value, earns interest each month.Sold at face value, earns interest each month.They are the same for this attribute.
They may be redeemed after one year.They may be redeemed after one year.They are the same for this attribute.
Minimum purchase is $25.Minimum purchase is $25.They are the same for this attribute.
Exempt from state and local taxation.  If used for education, exempt from federal taxation.Exempt from state and local taxation.  If used for education, exempt from federal taxation.They are the same for this attribute.
There is no secondary market.There is no secondary market.This is the same.  They can only be purchased from or redeemed at the Treasury.
This program started in 1998.This program started in 1980.There is a difference in how long they have been available.
The interest rate changes.The interest rate does not change.This is different.
No guarantees on return rate.This will double your investment if held for 20 years.This is different.
You can purchase up to $15,000 in I bonds annually. (The last $5,000 in bonds will be paper bonds, issued to you, and paid for from your tax refund.)You can purchase up to $10,000 in EE bonds annually.This is different.

The Verdict

Usually, there is no free lunch in this world, but it seems that both the EE and I bonds provide the investor with something that is pretty close to that mythical free lunch.  (And, in most instances, it would seem that the I bond was the better deal.)   Usually, higher potential reward goes hand in glove with higher risk, and in both of these examples, the interest rates are far higher than most bank accounts, and they are backed by the U.S. government.  The only real downfall with this kind of investment is that you really have to be quite vigilant in the keeping of your own records, and notifying family members of the location of your records.  In some families, this topic can bring out hurt, and raw feelings, so, consider carefully these advantages and disadvantages before making these securities a part of your healthy, balanced portfolio.







Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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