I Bonds for Inflation Investing

I Bonds for Inflation Investing
Looking for inflation protection? With food prices rising and the costs of many items going up and up its worth looking into ways to protect your savings. One way to do this is by purchasing Series I Saving Bonds. I Bonds are designed to grow in value with inflation-protected earnings. They give you a way to save and invest that guarantees inflation won't erode your savings. The following is some of their features.

I Bonds have a fixed rate and an inflation rate. I Bonds have a composite return meaning the return is a combination of a fixed rate and a variable inflation rate. The fixed rate, currently 0%, stays with the life of the bond until maturity. The inflation rate is based on the current inflation as measured by the CPI-U and is readjusted every 6 months (changing in May and November). The CPI-U stands for consumer price index-urban consumers and represents a basket of goods that the average person would purchase. Changes in prices of the goods indicates an increase in inflation. The current inflation rate is 2.20%. Earnings are added to the I bond each month and interest is compounded semiannually.

I Bonds are savings bonds issued by the Treasury Department. They are considered U.S. Treasury Securities and are backed by the full faith and credit of the U.S. government. This means you won't lose your principal or interest unless the government would default.

These bonds are issued for 30 years but they are liquid. They can be cashed in any time after the first year. However, a penalty of three months interest will be deducted if you cash the bonds in before 5 years. If held after 5 years they can be cashed in for their full value.

All savings bond are state and local income tax free and I Bonds are no exception. Federal income taxes can be deferred until the bonds are cashed in.
This makes them a tax-advantaged alternative to 401Ks and IRAs.

Although deflation is not a factor at this time it is worth noting that I Bonds perform well in a deflationary environment. If deflation should occur the principal and any accrued interest will remain intact. For example, if the fixed rate is 0% and inflation is a -3% the bond will hold its value and not lose any interest. If the fixed rate is 2% and inflation is -1% then the bond's rate is 1%.

There are purchase limits on I Bonds. As of this writing you can purchase up to $10000 of I Bonds through Treasury Direct electronically at www.treasurydirect.gov. They are sold at face value and start at $25. They are held in an online account. The only way to receive paper savings bonds is through a US tax refund. You may receive up to $5000 in paper savings bonds through a tax refund each year. They are sold at face value and start at $50. So the total for a calender year is $15000 - $10000 electronically and $5000 paper bonds issued through a tax refund.

So for a way to keep up with inflation and have advantageous tax treatment of a portfolio, I bonds fit the bill. Although the fixed rate is currently 0%, the inflation rate looks very favorable in the current low interest rate environment.

May I recommend my ebook, Investing $10K in 2013

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