I-Bonds from Treasury Direct as an Investment for an Emergency Fund

What the heck is a US Treasury Series I Savings Bond or better known as an I-Bond? The I-Bond is a bond offered by the US Treasury through their website call Treasury Direct whose interest rate floats with inflation, hence the name I-Bonds, inflation adjusted interest rate bonds. Their interest rate changes twice a year based upon the US government’s index of inflation called CPI-U (Consumer Price Index- Urban, which includes food and energy). The overall interest rate has two components a fixed rate and a variable rate that floats with inflation. I-Bonds can only be purchased and held in and by the Treasury Direct website. They are not commercially available from your broker or a discount broker. There is no transaction fee or commission paid to any organization when you purchase these from the US Treasury.  US citizens are limited to a maximum of $10,000 of investment per citizen annually. The interest rate floats with inflation and the interest is tax deferred until the bond is redeemed. These two features make them attractive to investors, especially smaller investors. The bonds do not have a maturity but stop paying interest after 30 years, so you don't have to sell them until you either need the money or 30 years has passed. I-Bonds are state tax free and if you use the principal and interest to pay for qualified educational expenses, the interest is federally tax free. I-Bonds are not eligible for qualified accounts like an IRA so you must use after tax dollars to purchase them. You fund them with a bank transfer to Treasury Direct and when they are redeemed, the proceeds go directly back into your bank account. These features make this investment liquid enough to be used for your emergency fund.

Several Aust Financial Advisory clients have purchased I-Bonds in the past as has the author of this blog posting. While these bonds have great unique, positive features, there are some disadvantages which are listed below:

•    Limited investment amount annually, $10K electronically and $5K in paper bonds if you pay for them with an income tax refund.

•    In a low inflation or deflationary price environment the bonds will underperform other US government bonds.

•    Some question if CPI-U is a true measure of inflation.

•    Dealing with the overly secure Treasury Direct website can sometimes be difficult.

Check out Treasury Direct and the Series I Bonds. You may find them just the right vehicle for your savings. Please read all information on the Treasury Direct site concerning these bonds and contact your financial planner to determine their appropriateness for your situation before purchasing. 

The URL for Treasury Direct and Series I Bonds is: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm#cost