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Evan and Robin's Journey:
Bonds, Bonds, Bonds
Over the past few weeks and months, I had seen several news reports about I Bonds, usually with a corresponding endorsement of their attractiveness as an investment in today’s market. I’ll be honest, my only experience with bonds was a savings bond that I received as a child – and I can remember waiting for what seemed like an eternity until I (and the bond) were old enough to cash in. After that I haven’t given them much thought until the past couple weeks.
I started with the basics – two different types of bonds, EE & I. EE was the type I had prior experience with the fixed rate bond. Right now (11/1/22 through 4/30/23) EE bonds are issued at a 2.10% rate. I bonds are a variable rate bond comprised of a fixed rate – which never changes for the life of the bond, and the variable (or inflation) rate, which is adjusted every 6 months. Right now (11/1/22 through 4/30/23) I bonds are issued at a 6.89% rate. Both types of bonds earn interest monthly, and that interest is compounded semiannually, with a maximum term of 30 years. You can purchase both types of bonds electronically between $25 and $10,000 in increments down to the penny. The bonds are required to be held for a minimum of 12 months prior to redemption, and if you redeem them within five years you lose the last three months of interest earned. With both types you have the option of reporting each year’s interest earned on your taxes or defer reporting until the bond is cashed in, when the all the interest would be reported for your taxes. You can also cash in any amount of the bond greater than $25 (and would receive the corresponding interest earned), providing that if the bond is only partially redeemed that a minimum of $25 dollars remain. Both types of bonds are also eligible for a tax exclusion if used to pay for higher education, provided several restrictions are met.
There are a few differences between the two types, outside of how they earn interest. For EE bonds, the annual maximum limit is $10,000 per person (tracked by SSN). For I bonds the annual maximum limit is $10,000 in electronic bonds, but an additional $5,000 could be purchased in paper bonds with your tax refund (using IRS Form 8888), for a total of $15,000. And the I bond limits are per entity, not per person. So, a person using their SSN could buy separately from a business using their EIN.
So, after learning this, and taking some time to mull it over – reflecting on what we had previously discussed with our Summit Financial Advisor, we decided we aren’t ready to pull the trigger on bonds. For us there is some lower hanging fruit in working to maximize our employer sponsored retirement accounts that would be more beneficial that we are working to focus on. But this effort did help give us a greater understanding of prioritization and strategies about what options are available should our financial situation change.