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Savings bonds offer 7.12% interest, what you need to know

Published: Nov. 24, 2021 at 2:34 PM CST|Updated: Nov. 24, 2021 at 2:37 PM CST
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BIRMINGHAM, Ala. (WBRC) - Inflation is an expensive problem and it’s impacting all of us.

As costs go up on almost everything, savings bonds, the underdog of the financial investment market are back on the scene. Inflation bonds or I bonds are offering seven percent interest.

Marshall Clay, Senior Advisor at the Welch Group, helps us put this in perspective.

“All investors are looking for a way to not only preserve their capital, but probably more importantly in this environment, protect against inflation,” Clay explained. “When you’re looking around at all the different investment products out there certainly Series I bonds are something that you can look at.”

Now for the fine print: I bonds or inflation bonds are sold by the U.S. Treasury, the seven percent interest rate is only guaranteed through April.

Here’s how it works: I bonds have two different rates. The fixed rate is locked in through the life of the bond. Unfortunately it’s been zero since May 2020. The variable rate is based on inflation and resets every six months. Those two rates are combined to create the composite rate. In this case, the variable interest is seven point one-two percent. Those who purchase now will lock in a zero fixed rate, leaving their investment to the rise and fall of inflation.

“Right now inflation is really robust,” Clay added. “You’re getting paid more for this bond, but that could adjust over a six month period. You just have to be aware of that.”

Investors can purchase anywhere from $25 to ten thousand dollars’ worth of I bonds. Marshall says this isn’t for someone who needs quick access to their money.

“You have to hold the bond for at least a year,” Clay acknowledged. “It’s not as liquid as some other bonds that are out there. If you sell within a five year period of time, you lose the previous three months’ of interest. So they’re giving you this decent rate, but there’s some restrictions on liquidity.”

As for the long game, who could benefit the most should the fixed rate increase?

“If you’re someone who feels that inflation is going to be a continuous problem, which I personally believe that to be the case, purchasing a two or five thousand dollar bond for a grandchild or something like that may actually be a pretty good investment long term because you could hold those things for 30 years,” Clay answered. “Even a small investment, if inflation continues to run relatively high, can be fairly lucrative to somebody.”

Those who purchased I bonds when the fixed rate was higher could be earning around ten percent interest right now.

Purchasing I bonds now likely won’t have the desired return for those who heavily invest.

“You have to look at each person’s specific case facts. Let’s say if somebody is still working, the first question I always ask people is are you maxing out your 401k or are you taking advantage of all those tax-deferred opportunities? Even though you may be getting a great rate on the bonds right now, if you’re maxing out your 401k contributions, you’re getting a guaranteed rate of return on your money,” he added. “If you’re in the twenty to twenty-four percent tax bracket, you’re putting one dollar in there and you’re saving twenty-two or twenty-four cents on the dollar because you aren’t having to pay on that.”

I bonds are not taxed at the state level, however they are federally taxed.

Bonds must be purchased through the U.S. Treasury website.

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