• Aaron Meaders

The Supreme Guide to Fighting Inflation With I Bonds | The Treasury of the People

Updated: Jul 14


Inflation is a measure of the rate at which the prices of goods and services rise in an economy. This is compared to the rate at which the value of a currency is falling.


Even though U.S. inflation rates are relatively low, there has been an increase in this year's inflation rate. As inflation continues to rise, I bonds can be a tool in fighting the negative impacts of inflation.


I bonds are government savings bonds, also known as Inflation-adjusted savings bonds. They are inflation-protected bonds intended to protect the investor from inflation. The payout increases or decreases in step with the effects of inflation.


I bonds are a 30-year bond with interest rates that change based on the Consumer Price Index (CPI), the country's main inflation gauge. I bonds are savings bonds that earn interest by combining a fixed rate and an inflation rate.


The fixed-rate is the interest you get for your bond when you buy it. It does not change, and it is an annual rate. The fixed rate does not change. It remains the same throughout the life of the bond.


The inflation rate, however, does change within six months. Inflation rates are set every six months based on the changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food, transport, and energy. The difference in inflation rate is applied to bonds six months from the bond's issue date.


Part 1: Inflation Rates in the U.S. 2022

Part 2: How Do I Bonds Work

Part 3: How I Bonds Adjust for Inflation

Part 4: The Current Rate for I Bonds

Part 5: How To Buy I Bonds

Part 6: When To Buy I Bonds

Part 7: How To Track Purchased I Bonds


 

Part 1: Inflation Rates in the U.S. 2022

The Consumer Price Index for May is down slightly from last month's reading of 289.109. Still, it shows an increase over the year-ago level of 284 - which means prices are rising faster than ever before! This steady hike in cost could influence your decision on whether or not to purchase anything this summer. It might be worth looking into cheaper vacation spots now. At the same time, they're still affordable enough, so you don't feel like a sap compared to other families who went off somewhere during their childhoods.


 

Part 2: How Do I Bonds Work

The U.S. uses the Consumer Price Index (CPI) to calculate inflation, so inflation-protected bonds like I bond will correspond to the CPI. When CPI goes up, it means inflation is increasing. The I bond, linked to the CPI, will increase its payouts.


However, the principal repayment will be either an inflation-adjusted principal or the original principal at the maturity date, whichever is greater. Undoubtedly, I bonds will not lose value due to deflation or negative interest rates.


I bonds work like regular savings bonds. It pays a monthly interest which starts from the first day of the month you purchase the bond. The interest builds up over 30 years or until you cash the bond. One benefit of I bonds is a tax on the interest can be deferred until you cash out your money.


I bonds have some restrictions. During the first 12 months after purchase, you can't make a withdrawal. And I bonds should be held for at least 5 years, or you bear the penalty of cashing out during the first 5 years, which is paying three months of interest.


Like all savings bonds, I bonds cannot be traded on a secondary market. They cannot be transferred to someone else. They need to be redeemed by the original person that purchased the bonds or the person's estate.


 

Part 3: How I Bonds Adjust for Inflation

I bonds, also known as inflation-linked savings, are connected to the rise and fall of the consumer price index (CPI). CPI measures the change in the prices of consumer goods over time, including food items, transportation, medical care, energy, and so on.


The CPI figures are released every month, and the U.S. Bureau of labor and statistics (BLS) tracks its results over time.


 

Part 4: The Current Rate for I Bonds

The interest rates for I bonds are a combination of a fixed rate that remains the same for the life of the bond and an inflation rate that is set twice a year. The combined rate for bonds issued from May through October 2022 is 9.62%. This rate will apply for the first six months of owning the bond. Currently, I bonds pay a 9.62% annual rate. The sales of I bonds have grown to over $9 billion from December 2021 to April 2022, as shown by the U.S. Treasury data.


 

Part 5: How To Buy I Bonds

To purchase I bonds, you must open an account at the TreasuryDirect website. I bonds have an annual limit of $10,000 purchase per person. For married couples, each spouse can buy up to $10,000. $20,000 when combined.


When you buy I bonds through TreasuryDirect, you can invest as little as $25, and for tax refunds, the purchases come in increments of $50. When buying online, you can invest any specific amount, and for paper bonds, you can buy in increments of $50, $100, $200, $500, and $1,000. Electronic bonds are also available for purchase in any denomination above $25.


If you qualify for a tax refund, you can opt to receive some or all of your refund as I bonds. The bonds will arrive as a paper certificate, which can convert into electronic form.


Although most investors may find it more convenient to purchase electronic bonds through Treasury Direct, a paper I bond is suitable to give as gifts. To gift someone and I bond, the recipient must have a TreasuryDirect account to receive the gift. You must have the beneficiary's S.S. number.


To set up an account on TreasuryDirect takes just a few minutes. After selecting I bonds, TreasuryDirect pulls the funds from your bank account. You link the account to either your savings or checking account. I bonds can be purchased on the same day you open your TreasuryDirect account.


I bonds are only taxable at the federal level, its interests are exempt from local and state taxes. When I bonds are used to pay for college expenses, you may be exempt from paying taxes, a tax break until you redeem your interest, or the bond matures.


Children below the age of 18 cannot open a TreasuryDirect account, even though they can own I bonds. You can open an account and link it to your child as a parent. This will allow you to buy bonds in your child's name.


 

This Table shows I bond purchase limits per calendar year.

Individuals

$10,000

​Married Taxpayers

$20,000

Business Entities

$10,000

Paper Bonds Per Tax Return

$5,000

Certain Trusts and Estates

$10,000


 

Part 6: When To Buy I Bonds

The inflation rate component of I bonds is changed by the U.S. Treasury every May and November.


Investors who purchase new I bonds in May and November will get the new composite rate that reflects the updated inflation rate that takes effect May 1 or November 1, respectively.


In April or August, those who purchase new I bonds will use the previous composite rate for the first six months of ownership. Then the holder will get the announced composite rate in the second six months of ownership.


All I bondholders will earn composite rates of interest that are in effect when the I bond is purchased. All subsequent composite interest rates are announced after the I bond is purchased. Although the new composite rate may be unknown, it is better not to wait to buy bonds.


 

Part 7: How To Track Purchased I Bonds

Even though you won't receive regular statements about your TreasuryDirect account, you can track your purchased I bonds through your TreasuryDirect account because your account shows the value of your current holdings.


If you purchased paper bonds, you could use the Treasury's savings bond calculator to keep track of your bond. You will get a 1099 tax form if you redeem your holdings.


Many financial planners recommend you let your trusted family members know about your account and mention it in your estate plan if you can no longer manage it yourself because a lot can happen in 30 years.


You should also consider designating a next of kin to your TreasuryDirect account, someone who will redeem the money if you pass away.


 

Final Thoughts

Even though there are a few downsides to I bonds, like having your money tied up for a long time, limited options for purchasing the bonds, and confusing rate formulas to some.


I bonds are the perfect tool in fighting inflation because your interest rate increases as inflation rates increase. They are virtually risk-free investments. This is a great way to save money and protect your savings from inflation as consumer prices rise.


 

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