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How Tax-Deferred Interest with Series I Bonds can dramatically Increase Your Profit

Inflation is seldom a good thing. However, the one time it is a good thing is when it comes to investing. A well kept secret you should know about is the U.S. Treasury Department’s amazing inflation opportunity. You can buy bonds that pay 9.62 percent interest—tax-deferred—with no downside risk, and with no state or local income taxes when you cash them in.

 

If you buy now, you earn that 9.62 percent for six months, guaranteed. At the end of six months, the Treasury Department will:

  • adds the interest you earned to your principal, and
  • pays interest on your new principal balance at the new rate it will determine this year, on November 1.

There are a few things you need to know about I bonds:

  • You can’t lose your principal (e.g., your $10,953 in the example above can’t go down).
  • Interest rates on I bonds track with the consumer price index inflation rate, which has been high.
  • You earn tax-deferred compound interest until you cash in.
  • The interest is exempt from state and local income taxes.

You have much to like with the Series I bond. And there’s little to dislike. Perhaps the biggest dislike is the $10,000 limit on I bond purchases, but you can use your business entities, trusts, gifts, and even your living trust to make purchases of I bonds and create a much higher limit than $10,000.

 

The biggest deal with the I bond is that it carries no downside risk. It can’t go below its latest redemption value, and the interest rate can’t go below zero.

 

The one thing you need to pay attention to is the interest rate. It changes with inflation. The Fed wants to lower inflation to its target 2 percent. For most people, this means that the I bond could be a short-term investment—say, one to five years.

 

But think in the short term now. Where else can you earn 9.62 percent tax-deferred interest, risk-free?


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