Benefits of I bonds for practicing physicians

Naveed Saleh, MD, MS | January 11, 2022

The Dow Jones Industrial Average recently hit a historic high of 36,799, which is great for physicians who are already invested in the market. Fueled by federal stimulus money, stocks have been on a tear, but experts have expressed concerns over a bubble.

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While the prospect of investing in equities is scary for many, there are asset classes worth your hard-earned cash. For example, series I savings bonds may be a good bet, and they’re starting to attract more attention. 

I bonds explained

These low-risk savings vehicles accrue interest and act as a hedge against inflation. The interest rate on the new batch of these bonds, which were issued in November 2021, is 7.12%. That rate is good through April 2022.

Currently, I bonds are being issued at their second-highest initial rate offered, which handily beats out the average rate of a 1-year, online Certificate of Deposit, which is less than 0.5%.

The minimum purchase required is $25 for an electronic I bond and $50 for a paper bond, with maximum yearly purchases capped at $10,000 and $5,000, respectively. Electronic I bonds are sold in penny increments exceeding $25, whereas paper bonds are sold in $50, $100, $200, $500, and $1000 denominations. 

Paper I bonds are available for purchase by mail using your tax refund, and electronic I bonds are available for purchase online using TreasuryDirect. The bonds are sold at face value. In other words, the cost of a $100 bond is $100.

Composite rate

The annual interest rate is based on a fixed rate and a semiannual inflation rate, with interest added each month. These rates combined are called the composite rate. The interest is paid at the time that the bond is cashed.

The fixed rate of return is stable during the duration of the bond, whereas the variable semiannual inflation rate is derived from the Consumer Price Index for all Urban Consumers (CPI-U). These rates are published by the Bureau of the Fiscal Service in May and November of each year. 

Of note, the May rate is based on the difference in the CPI-U between the previous September and March, and the November rate is based on this difference between March and September. The interest rate can never plunge to less than zero, and the redemption value can’t be less than what you initially paid.

Even if your old I bonds were issued at a higher rate, it may not be in your best interest to cash them and buy the newer, higher-rate bonds. 

For example, a newly issued I bond in May 2021 had an interest rate of 3.54%, and one issued in November 2013 had a rate of 1.38%. However, in May 2021, the bond issued in November 2013 had a rate of 3.74%, which was higher than its initial interest rate and that of the new bonds issued in May 2021.

Looking back further, when the fixed-rate component was higher, investors in I bonds issued between May and October 2000 now earn 10.85%, because the current variable inflation rate is added to the bond’s then-fixed interest rate of 3.6%.

Redemption

I bonds accrue interest for either 30 years or until cashed, whichever comes first. You must own them for at least 1 year. There are penalties for early redemption. If cashed within 5 years of purchase or fewer, you forfeit the last 3 months of interest. If cashed after 5 years, however, there is no penalty.

Taxation

Savings bonds are not taxed by any state or local government. If they are part of an estate or inheritance, however, corresponding taxes do apply. However, interest earnings are subject to federal income tax. When used to pay for education, interest earnings can be deducted from federal income tax.

Finally, you may be wondering about the difference between Series EE bonds and I bonds. EE bonds earn a fixed rate of interest, and they are another type of low-risk investment. These bonds are the “classic” savings bond that you may have received from a grandparent back in the day.

Despite the rate at issue, EE bonds double in value every 20 years. I bonds grow with inflation, with no guarantee to grow in a prescribed fashion.

Bottom line

Whether you’re an adventurous physician investor with a little extra cash or a risk-averse saver trying to protect your assets from volatility, the I bonds may be worth investigating.

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