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Using I-Bonds As A Cash Management Tool

Using I-Bonds As A Cash Management Tool

Are you sitting on a cash stash and looking for alternatives to the sub 0.6% interest rate you might be getting from your checking or savings account?

Traditionally fixed income was used to insulate a portfolio against equity market volatility. However, in the low-interest-rate environment of the last few years, investors have struggled to be rewarded from this allocation. Despite analysts expecting the Federal Reserve to hike interest rates seven times this year, we continue to be at historically low levels. During this period, investors have held on to safer accounts and been willing to bear the measly interest rates offered while giving up any potential return. Or investors have been forced to explore the less secure areas of fixed income such as high yield bonds or subordinated debt in search of higher returns with higher risk. With the current US inflation rate above 8%, there may be a way for individuals to earn a stronger rate of return while enjoying principal protection through Federal Series I Savings Bonds. I Bonds are inflation-adjusted US government bonds and are tax-deferred. I Bonds could be an attractive alternative cash savings strategy for you to consider.


Source: ycharts as of March 31st, 2022 The Basics of I Bonds

What is an I Bond?
It is a savings bond that earns an interest based on combining a fixed rate and an inflation rate.

What interest do an I Bonds earn?
The Treasury determines the I Bonds fixed rate every six months and applies it to all I Bonds purchased during the following six months. The interest rate is a combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year (May 1 and November 1). For bonds issued from November 2021 through April 2022, the combined rate is 7.12%.

Is it taxable?
There is federal income tax and no state and local taxes to pay.

How much can I buy?
The maximum purchase is $10,000 (electronic) and $5,000 (paper) per person each calendar year. It may seem like the purchases are restricted, but a couple could purchase a combined worth of $20,000 and I Bonds can also be purchased for children by trusts and estates.

How long must I keep an I bond?
I bonds have a 30-year maturity and can be redeemed after being held for twelve months. They are entirely illiquid for the one-year period and would not be an appropriate investment for anyone who needed access to the funds during the year. If you redeem it after one year and any time before five years, you forfeit three months of interest.

How do you buy an I bond?
I Bonds are offered through the Treasury Department. You can purchase online in TreasuryDirect.

In every market environment, it is imperative to take a proactive approach to determine your asset allocation so you can respond to market conditions and help your portfolio grow. Considering today’s environment, you may want to take advantage of using I Bonds as a cash management tool and take whatever yield you can find.

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