As inflation heats up, savvy investors look to hedge their bets.
Consider an investment in I bonds. This type of U.S. Savings Bond is designed to provide inflation protection. The interest income from I bonds is tax deferred. You can choose to pay tax on I bond interest annually if it suits your purposes.
I bonds earn interest determined by a combined fixed rate and a rate set twice a year based on inflation. Interest is earned for 30 years or until you cash in the bonds. Uncle Sam sets a new interest rate every six months. You can acquire I bonds in electronic form online through the Treasury Direct program. Alternatively, you can use your federal income tax refund to purchase them in paper form. The cost of an I bond is the same as its face value. You can buy a bond online in virtually every denomination of $25 or above, but paper bonds are sold in only five denominations: $50, $100, $200, $500 or $1,000. However, that there are annual limits on acquisitions. In each calendar year, you can buy up to $10,000 in electronic I bonds in Treasury Direct or $5,000 in paper I bonds using your tax refund. Generally, the interest income from most investments is subject to federal income tax in the year it is earned.
• You cash in the bond and receive what the bond is worth, including the interest;
• You give up ownership of the bond and the bond is reissued in someone else’s name;
• The bond stops earning interest because it has reached final maturity.
Alternatively, you can elect to pay tax on the interest income from I bonds in the year in which it is earned.