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Why I've got my eye on I Bonds

Apr 19, 2001 Write an essay on this topic.

The Bottom Line How would you like a tax-free and risk-free return of 6.49% adjusted for inflation every 6 months with penalty-free liquidity in 5 years? Check out I Bonds!

Diversification. We�re all supposed to have it in our portfolios. I don�t know about you, but I just can�t stomach a pre-tax return of 3% or 4% on my money. I�ve been looking for a risk free place to park some cash that earns a decent rate of return. Let me tell you why I have my eye on I Bonds.

-- What is an I Bond? --

I Bonds are a type of savings bonds offered by the United States Treasury. They are risk free because they are fully backed by the good old US of A. They are sold at face value (unlike the EE bonds you may be familiar with) and earn inflation-indexed interest for up to 30 years. Interest earnings can be tax deferred and even tax free, more about that in an upcoming paragraph. I Bonds come in various denominations and have portraits honoring eight different Americans representing the �diversity that grew this country� as follows:

� $50: Helen Keller
� $75: Dr. Hector Garcia
� $100: Dr. Martin Luther King, Jr.
� $200: Chief Joseph
� $500: General George Marshall
� $1,000: Albert Einstein
� $5,000: Marian Anderson
� $10,000: Spark Matsunaga

The bonds are attractive, and even kind of fun to collect.

-- How about the Interest? --

The current rate is 6.49% annually, accrues monthly, and is compounded semi-annually. It is a composite rate combining a permanent fixed rate (set each May and November) with an indexed rate based on inflation (announced each May and November). Your semiannual rate periods depend on what month you purchase your bond. Example: If you purchase a bond in January, your rate will be adjusted on January 1 and July 1 of each year.

Using FR to represent �fixed rate� and IR to represent �inflation rate�, here is the formula:
2 X [FR/2 + IR + (IR X FR/2)] X 100
The current FR is 3.40% and the IR is 1.52%
We end up with 6.49%

For the record, the composite interest rate has been no lower than 6.39% and no higher than 6.69% for the time period of September 1998 to April 2001, so you can see it�s pretty stable.

-- Tax Advantages of I Bonds --

The interest earned on I Bonds is State and Local tax-free. Federal income tax is deferred until you cash out the bonds.

If the proceeds of the I Bonds are used for your children�s qualified secondary education (most accredited colleges, universities, and vocational schools) the interest earned is TAX-FREE! You can use it for your own education free of taxation as well, as long as you were over the age of 24 at the time the bond was purchased.

There are some limitations to the tax exempt status:

� Tax Year 2000: AGI (adjusted gross income) of $81,100 and above the tax exclusion begins to be reduced, and at $111,100 it is eliminated.

� Tax Year 2001: AGI of $83,650 and above the tax exclusion begins to be reduced, and at $113,650 it is eliminated.

� Married couples must file jointly.

� If you are planning to buy I Bonds for your child�s future education, be sure to purchase them in your own name, not in the name of the child because the child does not meet the minimum age of 24 at the time of the purchase.

-- How about the Fine Print? --

There are some general limitations to know about I Bonds:

� You may not cash out for the first six months.

� 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.

� If you cash out a bond before month�s end, you will lose the interest for that particular month.

� You may only buy $30,000 worth of bonds in a calendar year.

� You must have a social security number to buy bonds.

-- Where Can You Buy I Bonds? --

� Online:

The Government maintains a website called Savings Bond Direct. You can purchase bonds with a credit card and they are mailed to you within two weeks. The site also offers a program called EasySaver. This option allows you to pick the recipient, date of issue, and amount of the bond and it will automatically make regular deductions from your bank account.

The website, located at http://www.savingsbonds.gov is excellently laid out and has very comprehensive information available in an organized format.

� Banks:

I Bonds can be purchased at most financial institutions. The actual bonds will be mailed to the bondholder�s address within 2 weeks. Many banks also offer Bond-A-Month programs where you can automatically schedule the purchase of bonds on a regular basis.

� Employers:

Many employers offer a payroll savings plan where you can have a certain amount of money deducted from each paycheck towards the purchase of I Bonds.

-- I Ideas --

Great as a last minute gift! Both banks and the Savings Bond Direct online site offer nice looking gift certificates. The certificate will tell the recipient to be looking for their bond coming in the mail within 2 weeks time.

My plan is to purchase some I Bonds using a 0% promotional rate for purchases on my credit card. At the end of the promo period, I will pay off the card in full (because I saved money towards it each month) and end up with an extra 5 month�s worth of interest in my pocket from the Bonds! Cool!

A very nice resource is the Savings Bond Wizard located at http://www.publicdebt.treas.gov/sav/savwizar.htm It�s a free downloadable program that allows you to keep track of your burgeoning collection of bonds.

-- In Conclusion --

If you�re looking for a no risk investment with a reasonable return, or wanting to put aside some funds earmarked for your kids� education, you may also want to keep your eye on I Bonds. They�re a convenient, viable, and patriotic addition to your portfolio. :)

You may be interested in these other somewhat related reviews:

� Roth IRA, Traditional IRA, 401K... which what when where how why?
http://creditexpert.epinions.com/finc-review-2551-3869B5F-38C6E733-prod8

� Term, Whole, or Variable Life Insurance? A Life & Death Decision
http://creditexpert.epinions.com/finc-review-138B-AA80C6-39081A02-prod5

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