{"id":92,"date":"2009-12-02T22:33:00","date_gmt":"2009-12-02T22:33:00","guid":{"rendered":"http:\/\/stevendevtest.wordpress.com\/2009\/12\/02\/i-bonds-return-to-favor"},"modified":"2009-12-02T22:33:00","modified_gmt":"2009-12-02T22:33:00","slug":"i-bonds-return-to-favor","status":"publish","type":"post","link":"https:\/\/vhfinancialmanagement.com\/2009\/12\/02\/i-bonds-return-to-favor","title":{"rendered":"I-Bonds Return to Favor!"},"content":{"rendered":"
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A few months ago I was discussing with a client the fact that one of my favorite little tools, I-bonds, were not as effective as they once were. Over the last six months I-bonds were not attractive. The reason for the shortcoming was the negative inflation rate component of the composite return associated with I-bonds. <\/p>\n

While I-bonds have struggled over the previous 6 month period, the new rate is appealing. The new annualized rate for the six month period from November 2009 to April 2010 is 3.36%, and that\u2019s 3.36% tax deferred! <\/p>\n

Why I like I-bonds:<\/p>\n

1. They grow tax deferred! A taxpayer in the 25% tax bracket will receive an equivalent taxable return of 4.48% on the current I-bond six month annualized return. <\/p>\n

2. I-bonds can be used tax-free to pay for certain college expenses. Although, there are income restrictions to use this feature. <\/p>\n

3. I-bonds have an inflation component factored into to the composite (total) rate of return. If inflation creeps up, the total return of I-bonds will increase. <\/p>\n

4. I-bonds can be used as emergency funding in a financial plan. There are redemption restrictions:
\u2022 I-bonds cannot be redeemed within one year of purchase (special provisions may apply)
\u2022 I-bonds redeemed in years 2-5 incur a three month interest penalty. This penalty may be tax deductible.
\u2022 I-bonds redeemed after 5 years incur no penalties.<\/p>\n

5. I-bonds are a debt of the US government and are an extremely safe investment. Note: I-bonds have a composite rate, which is based on two components: 1. A fixed rate component, and 2. An inflationary component. While the fixed rate is locked over the life of the bond, the inflationary component varies based on inflation. This formula can create an interesting and rare situation where the inflationary component is negative and can reduce the composite rate to 0, but the rate will not fall below 0. In a nutshell, in the worst case scenario I-bonds will return little or even nothing, but you can\u2019t lose money! Also, the rates change every six months, so the prospect of this happening over of long term period is very slim. <\/p>\n

How I use I-bonds:<\/p>\n

1. As part of a client\u2019s emergency fund package.
2. As a tax-deferred savings vehicle.
3. College planning. This is an easy way for grandparents to gift small amounts for college without hassle.
4. Clients that hold large sums of cash can reduce their overall tax liability by moving money from a taxable money market type account into tax-deferred I-bonds. <\/p>\n

The previous six month period was not idyllic for I-bonds, but rates have improved. The effectiveness of I-bonds have returned. While not sexy or designed to outperform stocks, I-bonds can be a nice addition to almost any portfolio. <\/p>\n

If you would like to learn more about I-bonds, here are a couple good website suggestions:
http:\/\/www.treasurydirect.gov\/indiv\/research\/indepth\/ibonds\/res_ibonds.htm
http:\/\/www.savings-bond-advisor.com\/<\/p>\n

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