United States Savings Bond (I-Bond) Bond Review

Bottom-Line: As long as you can spare the investment cash, I say purchase I-Bonds and like traditional EE savings bonds, keep them tucked away for retirement.

In my opinion the recent economic turmoil has made 410(k) accounts that have traditionally invested heavily in the stock market, a losing proposition.  My personal 401(K) which invests in a fairly diversified mix of vehicles has lost close to $5000.00 since the beginning of the year in this now Bear market.  Now my wife and I have our retirement savings spread over a number of different investment vehicles including United States Saving Bonds in the form of I-Bonds, which are currently enjoying an average fixed rate hovering around 4.84% per bond. 

Unlike traditional EE Savings Bonds I-Bonds, one buys I-Bonds for the face value of the bond, making the bonds very liquid; e.g. we purchase $200.00 I-Bonds and pay $200.00 for them.  The beauty of the I-Bond is that we do not have to wait for them to mature to their face value.  And they earn compounded inflation-indexed interest for up to 30 years on that face value, and are sold in eight denominations: $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000.

I-Bonds increase in value monthly, and interest is compounded semiannually. The interest accrues and is paid at maturity (The interest on I bonds is comprised of two separate rates: a fixed rate of return and an annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U)).  Finally, I-Bonds are free from state and local tax, and federal taxes are deferred until the bonds are cashed out. 

I-Bonds can be used to pay for college tuition and fees and when you use the bonds for such up to 100 percent of the interest accrued by the I-bonds is exempt from federal taxes, subject to certain eligibility requirements.

Some caveats to consider:

• o You may not cash out for the first six months, and you must hold a bond for 12 months to get the original investment and earnings.
• o If you cash out before you have held the bond for five years, you will be penalized by forfeiting the last three months of interest.
• o If you cash out a bond before month's end, you will lose the interest for that particular month.
• o You may only buy $30,000 worth of bonds in a calendar year.
• o You must have a social security number to buy bonds.

Conclusion

As long as you can spare the investment cash, I say purchase I-Bonds and like traditional EE savings bonds, keep them tucked away for retirement, or for paying for college.  Either way, investment in them at this point in economic cycle just makes sense.

Given the volatility in the stock market, I recently reduced my 410(k) contribution to 2% and we are now buying (1) large denomination I-Bonds every month.  Instead of throwing good money after bad, we are investing our money is a stable, albeit conservative investment for at least the next year, or until the stock market emerges from the current Bear market.