Suze Orman has long been a fan of I bonds.
Financial guru Suze Orman has been singing the praises of I bonds for years. Although she says they may not be as attractive as they used to be and there are other alternatives, she believes they are still a great investment. But what exactly are I bonds? And why should you consider investing in them? Let's take a look at the ins and outs of these unique savings bonds to see if they're right for you.
What is an I bond?
I bonds are a type of savings bond issued by the U.S. government. I bonds protect you from inflation and are intended to provide a safe, low-risk investment option for individuals. I bonds earn interest for up to 30 years, and the interest is exempt from state and local taxes. The interest is also tax-deferred until you take a withdrawal. The interest rate on I bonds has two components: a fixed rate of return and a variable rate of return that is adjusted for inflation every six months.
The current rate for an I bond issued from November 2022 through April 2023 is 6.89%, which is a step down from the 9.62% offered from May 1 and Nov. 1 of 2022. The fixed rate applies to all I bonds sold during the six-month period. Currently, the fixed rate is 0.40%. The semi-annual (half year) inflation rate is based on the Consumer Price Index and is currently 3.24%. The combined rate is called the "composite rate" or "earnings rate." The only place to buy I bonds is through TreasuryDirect.gov. You cannot purchase them through a typical brokerage firm.
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The benefits of investing in I bonds
Suze Orman has long been a fan of these unique savings bonds because they offer so many benefits over other types of investments. For starters, they offer a guaranteed return on your investment, unlike stocks or mutual funds, which may go up or down over time. They have a low minimum purchase amount ($25) which makes them accessible to almost everyone who wants to invest their money wisely.
In addition, because the interest earned from them is tax-deferred until you cash them in (or until 30 years have passed), they can be a great way to save for retirement without having to worry about taxes eating away at your returns each year. Finally, since they are backed by the U.S. government, there's virtually no risk involved. So even if the stock market takes a dive or another economic crisis hits our shores, your money will still be safe with an I bond.
The downsides of I bonds
While I bonds are currently returning close to 7%, the money is locked up for the very first year and can't be touched. In years two through five, the penalty to liquidate is three months' worth of interest. And after five years, you can take your money out any time you want. In a recent podcast episode, Orman stated that I bonds are still a great investment, but rates can go down just as fast as they went up. Since inflation can go up or down, deflation can bring the combined rate down below the fixed rate (as long as the fixed rate is not zero).
Because interest rates have skyrocketed, Orman says a CD or Treasury Bills can offer rates just as high without having to lock in your money for a year. For example, a 6-month CD at Quontic Bank is currently at 5.05% and a 26-week T-Bill is close to 5%. Orman doesn't believe the renewal rate in May will be 6.89% or higher. As inflation goes down, the rate of I bonds will also be going down, since the rate resets every six months. When you take into account the penalty and lower interest rates, Treasury Bills and CDs will likely be better for investors in the long run.
I bonds are an excellent option for those who want to invest their money safely but still reap some rewards along the way. With their low minimum purchase amount, guaranteed return on investment, inflation protection, and tax-deferment features, it's no wonder Suze Orman continues to recommend them. But since she believes I bond rates will most likely go down, CDs and Treasury Bills may be better alternatives for the long run.
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FAQs
The downsides of I bonds
Are I bonds still a good idea? ›
I bonds are a safe investment backed by the U.S. government that protects against inflation with a combination of fixed and variable interest rates. While I bonds offer tax advantages and low minimum investment amounts, they have downsides, including a penalty for early redemption and fixed rates that can be low.
What is the downside of an I bond? ›
Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
Should I move my money to bonds now? ›
We suggest investors consider high-quality, intermediate- or long-term bond investments rather than sitting in cash or other short-term bond investments. With the Fed likely to cut rates soon, we don't want investors caught off guard when the yields on short-term investments likely decline as well.
Is there a better investment than I bonds? ›
TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you're saving for education, I-bonds may be the way to go.
Can you ever lose money on an I bond? ›
You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline.
Are I bonds still a good investment in 2024? ›
At an initial rate of 4.28%, buying an I bond today gets roughly 1% less compared to the 5.25% 12-month Treasury Bill rate (May 1, 2024). You could say that buying an I Bond right now is a 'fair deal' historically compared to 2021 & 2022 when I Bond rates were much higher than comparable interest rate products.
Why is bond not a good investment? ›
There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall.
Are I bonds worth the hassle? ›
I bonds can be a safe immediate-term savings vehicle, especially in inflationary times. I bonds offer benefits such as the security of being backed by the full faith and credit of the U.S. government, state and local tax-exemptions and federal tax exemptions when used to fund educational expenses.
Which is better series, EE or I bonds? ›
Bottom line. I bonds, with their inflation-adjusted return, safeguard the investor's purchasing power during periods of high inflation. On the other hand, EE Bonds offer predictable returns with a fixed-interest rate and a guaranteed doubling of value if held for 20 years.
For bond investors, these conditions are nearly ideal. After all, most of a bond's return over time comes from its yield. And falling yields—which we expect in the second half of 2024—boost bond prices. That boost could be especially big given how much money remains on the sidelines, looking for an entry point.
Why are bonds losing money right now? ›
What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
How long should you keep money in an I Bond? ›
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
Which is better, I bond or CD? ›
After weighing your timeline, tolerance to risk and goals, you'll likely know whether CDs or bonds are right for you. CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.
Should I buy bonds or CDs? ›
Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk. When interest rates are high, a CD may yield a better return than a bond. When interest rates are low, a bond may be the higher-paying investment.
What will the next I bond rate be in 2024? ›
The 4.28% composite rate for I bonds issued from May 2024 through October 2024 applies for the first six months after the issue date. The composite rate combines a 1.30% fixed rate of return with the 2.96% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
How long should you keep money in an I bond? ›
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
Are I bonds better than CDs? ›
If you're investing for the long term, a U.S. savings bond is a good choice. The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases. If you're saving for the short term, a CD offers greater flexibility than a savings bond.
