I-Bonds are government savings bonds sold to you by the U.S. Treasury. They're not the old savings bonds bought for you when you were kids. But they're a way to invest money for the conservative part of your portfolio. Let's check out what they have to offer you...
The 'I' is for inflation protection. And that's one component of their earnings. I-Bonds carry two earnings components. One is its interest rate, but it tends to be quite low. That's because the other component adjusts the value of the I-Bond according to the inflation index. Inflation adjustments are done every 6 months.
Of course, as a government-issued bond, its security is backed by the full faith and credit of the U.S. government. If the government can't pay its debts we might as well throw in the towel. And if it pays with inflation-ridden dollars, then the I-Bond will be inflated appropriately to offset the loss in purchasing power of those dollars you bought it with.
I-Bonds offer two good tax benefits. Its earnings are free of state and local income taxes. The other tax break is that, although its earning are subject to federal income tax, these earnings are tax-deferred until you sell them. Tax-deferred income enhances the compounding rate of your investments. Interest from TIPS (Treasury Inflation Protected Securities), another inflation-protected government offering, doesn't get this tax-deferred break.
You can purchase I-Bonds as paper bonds ($50 minimum) or as 'online' electronic purchases - all in increments of $25. You're limited how much you can buy in a year: $5,000 for paper I-Bonds and $5,000 for electronic ones. So that's $10,000 per year per person - or $20,000 for a couple.
You should regard I-Bonds as longer term investments. That's because if you redeem them within the first 5 years of ownership, you'll lose 3 months of interest as a penalty. But you can hold them up to 30 years - and that's a lot of tax-deferral.
-To sum-up the benefits of I-Bonds:
* They are tax-free under state and local taxes, and tax-deferred under federal taxes.
* They offer two components to their earnings for you: an interest component, based on current interest rates, and an inflation adjustment to their dollar-dominated value every 6 months.
Remember its interest component will be less than current interest rates of other bonds since they have that inflation-protection earnings component. This is important if inflation really begins to kick in.
Lastly, you can purchase them online to save you the time and trouble of holding paper renditions of them.