iBonds Update December 2011

This site has been a big fan of iBonds for several years now. Here is a link to a post I wrote in early 2010 that basically sums up the key elements of iBonds including:
– very low risk
– able to defer taxes indefinitely until redemption (up to 30 years). They are also exempt from state and local taxes
– very competitive interest rate of a “base” low amount plus inflation adjusted every six months
– able to buy $10,000 / year worth of bonds (that is the limit if you buy “jointly” between you and your spouse, but you can buy $10,000 in your name and $10,000 in your spouse’s name if you are not worried about will or trust issues)
– because they are very simple (deferring taxes) you don’t have to do much of anything as far as work to maintain these securities. You won’t get a 1099 form for interest if you select the “base” method which is deferring taxes until maturity or until you redeem them

The downsides are
– you can’t get at the money for 12 months (your latest purchase; if you have been buying iBonds annually for years it is only your most recent purchase that is held for 12 months)
– if you redeem within 5 years, you lose 3 months of accrued interest
– the interest rate, while WAY better than money markets or savings accounts, isn’t that great. The “base” interest rate offered by the US government now is 0.0%, so essentially you only receive the inflation component. Even with a “0.0%” base interest rate, inflation paid about 3.75% in 2011 which is a great rate considering the alternatives

Here is a link to the Treasury Direct site discussing iBonds. Starting 1/1/12 the US Government will no longer issue paper iBonds anymore. Thus you must buy them through the US government if you want them.

The Wall Street Journal recently had an article about iBonds. The article summarized their advantages and noted that beginning 1/1/12 they no longer were going to allow for “paper” issued iBonds which limits the number of bonds individuals can purchase. This article says that iBond limits were going to be $5000 per person; the treasury recently updated their rules and now you can buy up to $10,000 per person.

If you haven’t bought iBonds before now would be a good time to start. You can purchase bonds by year end 2011 (the next few days) and then buy some in early 2012. This starts the “clock” on the 12 months where you can access your money. After that the money is available for short-term cash needs (you do lose 3 months of interest in the next 5 years).