There weren’t many safe investments that could beat inflation except for I bonds, but even this safety net may not soon pack such a powerful anti-inflation punch.
This is because the benchmark interest rate of 9.62% on bonds issued through October will drop on November 1 to 6.48%, which is much lower but still one of the best investments, experts say.
The price change is based on the change in the Consumer Price Index (CPI) from March to September. The new rate is lower than the 8.2% annual inflation rate in September, which means that when the rate is adjusted for inflation, you’re looking at a negative interest rate.
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What is an association and how does it work?
They are 30-year Treasury bonds that protect you from inflation. It pays a fixed interest rate and a rate that changes twice a year with inflation.
Interest is compounded semi-annually, which means that a new interest rate is applied every 6 months to a new principal value equal to the previous principal plus the interest earned in the last 6 months. The value of a bond grows because it earns interest and because the principal value increases.
You can buy $10,000 from the Treasury and another $5,000 using a tax refund. You can cash it out after 12 months, but if you do it in less than 5 years, you will lose interest in the last 3 months.
Do you pay taxes on I bonds?
You must pay federal income tax but there are no state or local taxes on I bonds. You can either report earnings each year or wait to report all earnings when you cash the bond.
If you use the money for eligible higher education expenses, you may not owe tax on earnings.
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Why does the variable rate go down when inflation is high?
The variable price of the I bond is based on the change in inflation in the past six months. In this case, the rate set on November 1 will depend on inflation from March through September.
“July and August slowed down somewhat bringing the inflation reading down,” said Ken Tommen, founder of bank account comparison site Depositaccounts.com.
The CPI was unchanged on a monthly basis in July from June and August rose 0.1%. In September, the monthly CPI accelerated again by 0.4%.
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What is the fixed price and does that change?
The fixed annual rate is announced every May 1 and November 1 for all I bonds issued over the next six months and remains at that rate for the life of the bond. It has been 0% since November 1, 2019.
The cabinet can narrow the gap between Inflation rate and interest rate by raising the fixed rate portion on November 1, but is unlikely to make the real yield or the inflation-adjusted yield positive. If the Treasury raises the fixed rate, it will likely be through a very small increase (for example, tenths of a percentage point).
The last time the ratio exceeded 1% was on November 1, 2007.
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Is my bond still a good investment?
Yes, because other investments of similar quality, including savings accounts, treasury bills, and certificates of deposit (CD), offer lower returns.
Online savings accounts offer interest just over 3% and CDs offer 4% interest, “and that’s the best, not the average,” Tommen said. Treasury bill yields are less than 5%.
Additionally, remember that the current rate of 9.62% is still valid on all bonds purchased through October 31. These bonds will earn 9.62% for six months, then turn 6.48% for the next six months. That would make a one-year return of about 8.05%, still not bad.
Or, “Maybe the next six months of inflation will be less than 9.62% and then the next six months will be less than 6.5%,” Tomin said. “If that happens, you will have a real return for next year.”
Also, they never lose money because the effective interest rate cannot go below zero and the redemption value cannot go down.
“Treasury will always exchange I bonds at face value if the investor holds that 12-month security,” John Rachenthaler, vice president of research at Morningstar, wrote in a note last month. “Practically, bonds have any maturity date that an investor desires.”
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What is the best time to buy an I bond?
To maintain the benchmark 9.62% six-month rate, buy I bonds by October 31. You’ll also earn your full October interest on November 1, Tumin said.
But to be safe, buy a little earlier because the locker will take two days to process your purchase.
“I found that you have to make sure that you buy no later than the second last business day of the month,” he said. “For this month, be sure to buy I bonds no later than Friday, October 28.”
He noted that this advice is if you already have an account created with the Treasury with a confirmed bank account. Otherwise, leave yourself more time to buy.
In general, “to maximize return, it is best to buy I Bonds towards the end of the month and redeem them early in the month,” he said.
Medora Lee is USA TODAY’s Money, Markets and Personal Finance Correspondent. You can reach her at [email protected] and sign up for her free Daily Money newsletter for personal financial advice and business news every Monday through Friday morning.
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