Should You Still Be Buying I Bonds? Suze Orman Thinks So

Suze Orman has long been a fan of I bonds.

Financial guru Suze Orman has been singing the praises of I bonds for years. Although she says they may not be as attractive as they used to be and there are other alternatives, she believes they are still a great investment. But what exactly are I bonds? And why should you consider investing in them? Let's take a look at the ins and outs of these unique savings bonds to see if they're right for you.

What is an I bond?

I bonds are a type of savings bond issued by the U.S. government. I bonds protect you from inflation and are intended to provide a safe, low-risk investment option for individuals. I bonds earn interest for up to 30 years, and the interest is exempt from state and local taxes. The interest is also tax-deferred until you take a withdrawal. The interest rate on I bonds has two components: a fixed rate of return and a variable rate of return that is adjusted for inflation every six months.

The current rate for an I bond issued from November 2022 through April 2023 is 6.89%, which is a step down from the 9.62% offered from May 1 and Nov. 1 of 2022. The fixed rate applies to all I bonds sold during the six-month period. Currently, the fixed rate is 0.40%. The semi-annual (half year) inflation rate is based on the Consumer Price Index and is currently 3.24%. The combined rate is called the "composite rate" or "earnings rate." The only place to buy I bonds is through TreasuryDirect.gov. You cannot purchase them through a typical brokerage firm.

The benefits of investing in I bonds

Suze Orman has long been a fan of these unique savings bonds because they offer so many benefits over other types of investments. For starters, they offer a guaranteed return on your investment, unlike stocks or mutual funds, which may go up or down over time. They have a low minimum purchase amount ($25) which makes them accessible to almost everyone who wants to invest their money wisely.

In addition, because the interest earned from them is tax-deferred until you cash them in (or until 30 years have passed), they can be a great way to save for retirement without having to worry about taxes eating away at your returns each year. Finally, since they are backed by the U.S. government, there's virtually no risk involved. So even if the stock market takes a dive or another economic crisis hits our shores, your money will still be safe with an I bond.

The downsides of I bonds

While I bonds are currently returning close to 7%, the money is locked up for the very first year and can't be touched. In years two through five, the penalty to liquidate is three months' worth of interest. And after five years, you can take your money out any time you want. In a recent podcast episode, Orman stated that I bonds are still a great investment, but rates can go down just as fast as they went up. Since inflation can go up or down, deflation can bring the combined rate down below the fixed rate (as long as the fixed rate is not zero).

Because interest rates have skyrocketed, Orman says a CD or Treasury Bills can offer rates just as high without having to lock in your money for a year. For example, a 6-month CD at Quontic Bank is currently at 5.05% and a 26-week T-Bill is close to 5%. Orman doesn't believe the renewal rate in May will be 6.89% or higher. As inflation goes down, the rate of I bonds will also be going down, since the rate resets every six months. When you take into account the penalty and lower interest rates, Treasury Bills and CDs will likely be better for investors in the long run.

I bonds are an excellent option for those who want to invest their money safely but still reap some rewards along the way. With their low minimum purchase amount, guaranteed return on investment, inflation protection, and tax-deferment features, it's no wonder Suze Orman continues to recommend them. But since she believes I bond rates will most likely go down, CDs and Treasury Bills may be better alternatives for the long run.