American Inflationary Savings Bonds
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Inflationary Savings Bonds, also known as I-Bonds or I-series Savings Bonds, provide interest while hedging against inflation. These bonds are registered to your social security number. Just like nominal savings bonds they cannot be traded or transferred, no secondary market for them exists. I-Bonds also have a purchase limit. You can purchase a maximum of $10,000 of bonds electronically per calendar year, and an additional $5,000 annually using a tax refund for paper bonds. Paper bonds can only be purchased with tax refunds and are also registered to your name. You can alternatively register it to your trust, estate, and some businesses.
The par value of Inflationary Savings Bonds can be set to the exact cent. Regular denominations begin with $25 and range up to $5,000. The purchaser will receive double the amount of the purchase price. These savings bonds provide interest that is based on the fixed rate combined with an additional inflation rate. The fixed rate is set and permanent for the life of your bond. The rate is announced every 6 months in May and November, and it sets the rate for all bonds issued for the next 6 months. It does not change bonds purchased before those dates. The fixed rate is an annual rate but the interest compounds semiannually.
The inflation rate provided by the bond, unlike the fixed rate, actually does change every 6 months. This rate also changes in May and November according to the consumer price index. Even if you were to suffer deflation, which would be highly abnormal, your bond will still redeem above par value.
You should note that they function like zero-coupon bonds. You will receive no reimbursement for the investment until the bond fully matures or it is redeemed by the purchaser. You can earn interest until the maturity in thirty years, or you can redeem the bond at any point after 12 months. If you redeem the bond before 5 years have passed, you will lose 3 months’ interest as penalty. There is no penalty for redemption after 5 years, and the maturity will force redemption after 30 years.
Taxes are still incurred on the Inflationary Savings Bonds, just like most zero coupon bonds, but they can be deferred until the maturity or redemption occurs. The interest gained will be subject to your income tax, and thus your income tax bracket, but it won’t be subject to either state or municipal taxation.
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