I-Bonds may sound like a good investment, but are they safe? Is it safe to use Treasury Direct?
What is an I-Bond?
To most people, and this post, an I-Bond is a type of government savings bond. It has a variable interest rate based on the rate of inflation.
I-Bonds are currently in the news because they have a 9.62% interest rate. This rate is due to current inflation levels.
iShares by BlackRock has an ETF product called iBonds. These are like regular bond ETFs except that they have a different ending date. These ETFs may have their uses, but they have nothing to do with savings bonds or this post.
What is Treasury Direct?
Treasury Direct is an official U.S. Government website. It’s where you can buy savings bonds and treasury bills, notes, and bonds.
Can the interest rate on an I-Bond go down?
Yes, the interest rate on an I-Bond adjusts every six months. The new rate applies to both new purchases and existing I-Bonds. So after six months, you’ll have a new interest rate based on inflation.
The current rates are much higher than they have been historically. In recent years, the interest rate has been as low as 0%.
Can you lose money on an I-bond?
Unlike other types of bonds, savings bond values don’t drop when interest rates go up. Savings bonds work like bank savings accounts or certificates of deposits. They are worth your initial investment plus the interest you’ve earned.
There is a very small risk of the U.S. Government not paying back savings bonds if they default on the debt. This would probably only happen in the event of a major financial collapse that also affected banks. Savings bonds are not FDIC-insured, but if the government wasn’t paying savings bonds, it probably wouldn’t be covering FDIC insurance.
Can you sell an I-Bond at any time?
One of the biggest risks of investing in savings bonds is that you can’t take your money out for 12 months. If you lose your job or have an emergency expense, there is no way to access the money.
12 months really means 11 months and 1 day since it goes by calendar months. If you buy an I-bond on January 31st, you can cash it in on January 1st next year.
After you hold an I-Bond for at least 12 months, you can cash it in at any time. You don’t get the last 3 months’ worth of interest payments if you don’t hold it for at least 5 years.
Does Treasury Direct have fraud protection?
A dealbreaker for many people is that Treasury Direct has no published fraud protection policy. If you ask their customer service, they will give you a scripted response that you are responsible for any transactions made using your password.
This implies that if your password gets stolen or your account gets hacked, they won’t reimburse you for any losses. Their website has a lot of security measures in place, but nothing is 100% secure. Some people don’t want to take this risk.
Will I-Bonds match inflation?
I-Bonds are almost guaranteed to earn less than inflation after taxes. You pay tax on savings bond interest even when it matches the inflation rate. So you’re really getting inflation minus your tax rate.
I-Bonds may still give a better return than other types of investments that may also do worse than inflation.
You can’t hold an I-Bond in an IRA, HSA, or other tax-sheltered account to avoid inflation.
Will Treasury Direct freeze your account?
Many people have trouble with Treasury Direct’s security systems.
One of the most frequent problems is if they decide you need to verify your bank account. They may require a medallion signature guarantee where you go to a bank and have a bank officer verify your identity. Many banks don’t offer this service because they become financially responsible if you aren’t who you say you are. This can leave you stuck in a limbo where you have money in Treasury Direct but aren’t able to connect a bank account to withdraw it.
If you forget your password or account number, it’s very difficult to get your account access back online. You need to enter a lot of personal information with an exact match. This might include entering your address as Street vs. St or having the routing and account number for a bank account you no longer use. Depending on the issue, it can take weeks to get verified by customer service.
I-Bonds often give you a better return than bank savings accounts or CDs, but Treasury Direct can be difficult to work with. Many people do feel comfortable using Treasury Direct, even when they know about these issues, so it’s up to how you feel about it.