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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Want Better Interest Than Banks are Paying? | I Bonds May Be Your Answer!

Updated: Nov 18, 2021

Inflation is going up, yet interest rates remain low. We talk about how I bonds are looking very appealing because they earn better interest than banks.

So what are the plusses and minuses of I-bonds?

First, let's just stipulate--people have a difficult time with calculating interest.

Regular banks are paying .01%. That means $10,000 earns $1 a year. If you can get 1% a year, that same $10,000 would earn $100, or one hundred times more. Even if you take money out of an I-bond in years 2-5, it’s probably will earn about $250 a year.

Next, let's talk about how I Bonds work. I bonds have fixed rate and variable rate. The fixed rate now is 0. However, the variable rate is over 3%. Their rate of return never goes below zero. If prices go down, you get zero. If prices are going up, you get the rate of inflation. You can put $10K per person a year. You can’t sell them for 1 year. There’s a reduction in interest if you take the money out in years 2-5. However, the interest rate is still better than bank accounts. Like FDIC insured bank accounts and US Treasury bonds, I bonds are backed by the US Government, so they're a safe investment. You need to buy them through US Treasury Direct. They aren't available elsewhere.

Please realize in this video and description we are trying to cover the basics of I bonds. We do not cover all the details. You need to look into I bonds yourself to understand if they're right for you. Thanks for watching! Please subscribe!


John: Interest rates are so low that nobody's earning anything in the Bank. What can a person do about that? I Bonds are one thing that might be appealing, and that's what we're going to talk about on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. And I've got a fee-only financial planning practice in Chicago, Illinois. John, with the interest rates and – inflation is going up, interest rates remain low. And so I know that for me, that’s peaked my interest in I Bonds, but it seems like it's something that you've looked into a little bit more than I have. So why don't you tell me a little bit about them? How much – what are the pluses and minuses?

John: Yeah, it’s great. I Bonds are something that have been around for about 20 years; late 90s they came out, and we just had a client meeting this morning or this week with a new client and one of the major big name banks, and all money in that bank account is earning .01%. It's almost a “why even do that” sort of thing.

Bridget: People don't understand percentages very well, like even .01%; that means that if you have –

John: If you have 10,000 dollars, you literally earn one dollar in interest per year.

Bridget: Right. So if you had an interest rate of one percent –

John: That would be 100 dollars.

Bridget: Yeah, okay.

John: Right, so we're talking if you have 10,000 in the bank earning a buck.

Bridget: Right, okay.

John: So one thing that, these I bonds have been around for a while, they're called “I” for inflation because they're tied to inflation, and you buy them right from the government. And today in today's environment, with this sort of inflation that you're mentioning with things right now for people that buy I Bonds, the rate for the next six months is actually three and a half percent, a little over three and a half percent. And because you're buying things right here from the government, it's a government bond, better than FDIC insured, right? It's backed by the faith of the government. So it's a great place to have money or something that people should consider. At least now we haven't used them very much in the past because the rate has been pretty low. We haven't had inflation. Now it's something that folks should consider. So there's three things I know that maybe, you know, some of this, but there's three major components, I guess, to how I look at the I Bonds.

So one is the interest rate. And what it is, is that there's two parts to it, and you don't need to know the formula. But there's a fixed rate, like, you get this every year, and you can keep these for 30 years. And then there's a variable rate that has its inflation factor. Well, right now that fixed rate is zero. That's not so awesome, right? Well, not much worse than .01%. But it's still not great. The inflation factor, those I mentioned, it's over three and a half percent, and every May and November, that rate gets reset. So six months ago, the rate was like one and a half percent. Not awesome, but not nothing either. Now it's jumped up with this inflation, so there might be a unique time here to get that return.

And the other thing about I bonds is it never goes below zero. So if inflation goes negative, so you get your worst case is zero. Best case is something higher than that. So that's one thing is that where the rate comes in.

Bridget: So there's no deflation.

John: There's no de – right.

Bridget: Deflation, you still get 0.

John: You get zero, right. And if all prices go down, you get zero. That works out pretty well.

Bridget: Right, and if there's inflation, you get the price of…

John: You get, it’s tied to inflation. You don't get inflation. But yeah, it goes up higher. We’ve had higher inflation. Now the rate goes up. Exactly. Then the other thing is that there are some limitations on it. One is that you can only buy 10,000 dollars. You can only put 10,000 dollars per year in into it.

Bridget: Right.

John: So you can't put 100,000 dollars if you have that in the Bank, but you can put 10,000 into it. And then there's some restrictions where you cannot access it. Like, you can't sell this thing for one year; so it’s like a one year CD. So if you need money in the short, in the really short term, no. If you’re saying, listen, my cash reserves for the next 2-3-5 years. That's great. In the first five years, so between years 2 and 5, if you take it out, it's sort of like a CD where you lose three months of interest. So you have a small – we never lose principle. You lose some interest in today's environment, right, we're talking about if you get three and a half initially, if you lose three months interest, it comes out to be something like two and a half or two and 3 quarters percent over one year. So you could buy something today, sell it a year and a day, and you get something like something over two and a half percent interest.

Bridget: Right, so it's still better than what you can get out there.

John: Absolutely.

Bridget: For a two year CD, or five year CD.

Bridget: Now the thing with the CD, right. The rate gets set. You buy a five year CD, you know what you're going to get each for the next five years.

Bridget: Right.

John: The I Bonds, we know what the next six months holds. We don't know what the next – in November, they're going to reset the rate. It's going to be different. But we can only put 10,000 dollars. It's not like your life savings will be in here necessarily.

Bridget: And so if inflation goes down, then in six months, it would go, you’d get big…earning zero on this thing.

John: If we have a deflation, that could be the case…

Bridget: Or if inflation’s zero, then it goes back down.

John: Right. They've got some sort of calculation – that's exactly right on it. So we don't know, it's not the same as five year. But again today for putting some money in that short term things, I think of people who maybe got a nice tax refund or we got a client that got a bonus from work. And Jeez, where do I put to short term? I mean, somebody’s little inheritance, maybe some extra money, or you got a little extra cash in your checking account or your savings account. It could be a really nice place for this. So there's some limitations as to what you can do; 10,000 a year, and you can't get to it for a year. It's tied with inflation. Right now, the rate is pretty good.

The other thing is from a tax standpoint is that there's no state or local taxes on it, ever. And then the federal taxes, you can defer it until you take the money out. So it's like a tax deferred CD, sort of a thing where you don't pay any interest until you take money out. And if you happen to use it for higher education purposes, there's no federal taxes on it either. So you can avoid it if it's for education. And in the meantime, you can defer things, taxes on it, and not pay it if you have taxes in your state. So there's some tax advantages to us. That's kind of the takeaway on that is nice interest rate today, tax advantage in some fashion, and there are some restrictions on it, but it's not too onerous as far as the restrictions on things.

So today, you put things in dollars. And I love that, Bridget, because percentages don’t mean anything. If you have 10,000 dollars earning .01% at the big banks at literally a dollar a year. If you do it, even if you take the money out of an I bond after a year, you're probably getting something like two and a half percent, which is 250 dollars in a year. Again, that rate is going to change in November. But listen, if you saw 200 dollars lying on the Street, you'd probably walk over and pick it up. By transferring some money into an I bond, it's like literally you're going to go listen, I can get a dollar or I could get to 250 or 300 or some number like that, right. The specifics aren't quite as important as it's free money for some of these short term things and some tax advantages.

Bridget: Exactly. And it seems like if you let it ride for a while, then you still can access it. But you get that higher interest rate.

John: Right, at least potentially, you know, 10 years ago, the rates weren't that awesome. But people have bought 20 years ago that base rate instead of zero. Some people have it at 3% or two or 2 and a half plus this three and a half percent they're paying now. I mean, there are folks that have had these a long time that are getting 5% these days, right? That's pretty – on a guaranteed basis. Golly. Where do you get that? Right?

Bridget: Yeah. So I think it's very worth considering, and it seems like a good time to wrap it up. So, John, thanks so much for talking about this. One thing I wanted to mention is that both John and I found out about I bonds through ACP or the Alliance of Comprehensive Planners. Most advisors don't talk about this because this is something that individual investors need to set up on their own. So there's no way for me to help clients do this except to point to the website and show them how to do it. I can't, whereas at Schwab or other custodians, as an advisor, I can have an account and help people do the paperwork. So you won't hear about it, because most advisors aren't going to be making any money to tell you about this. If I put it that way; and it's going to be on each individual to do the paperwork.

However, for people in ACP, this is the kind of stuff I think of this is like one of those little base hits that is our stock and trade. It's not a home run. It's not going to make you wealthy beyond – you're not going to become a billionaire by doing this, but Jeez it’s a base hit. This isn't going to win me the game, but what I need to win the game is a lot of base hits; at least one base hit right? At least a few base hits.

John: For viewers that are looking for people that will help with not just things that we manage, but for advice like this that's outside the scope of things. You can look up other advisors on We've got advisors all across the country that think like this and work in a similar fashion.

Bridget: The other thing is, please subscribe. Subscribing helps us a lot. So, if you can subscribe to our YouTube channel, it would help us a lot. With that, I'm Bridget Sullivan Mermel, and this is John Scherer.

John: Alright, thanks a lot Bridget.

Bridget: Thanks John.

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