August 15, 2022 In Financial Planning

I Bonds for inflation hedge

I Bonds – a government bond that is paying a lot more than it usually does

There are positives and downsides to them which I discuss below. I Bonds (letter “I”) are issued directly by the US Treasury and pay interest semiannually based upon a calculation that includes the inflation rate, making them an option for anyone looking for a safe place to store some cash for more than 1 year. In years past they haven’t paid much, but recently with the Inflation rate higher they now pay a very nice rate compared to Savings accounts and CD’s.

Interest Rate

  • From May 2022 – October 2022 they are paying 9.62% annualized (4.81% for the 6 month period).
  • The interest rate is recalculated every May 1st and November 1st. So the second 6 months will pay a different rate than the current 6 months.

Safety

  • I Bonds are backed by the US Government

Tax Benefit

  • You can defer paying taxes on the interest until the bond is cash out in future years.
  • It’s only taxed at the Federal level. So no state income tax (for those living in certain states).
  • May be tax free for college costs in some circumstances (used for dependents, below income limit, purchased in parents name, etc)

Cap

  • You can purchase between $25 up to $10,000/calendar year. You are able to purchase them for yourself, your spouse, any minors you have, in the name of your business, and in the name of a trust. For each of these the limit is $10,000/calendar year, so some of you may be able to purchase more than others (for example: Husband, Wife, & LLC for a total of $30,000)
  • The limits reset in January 2023 at which point you could purchase more.

Term

  • Any I Bond purchase must be held for at least 1 year.
  • If they are cashed out between year 1 – year 5 there is a 3-month interest penalty (last 3 months). Given the current rates, even with the interest penalty it would most likely be a good return.
  • After year 5 there is no penalty and they keep earning interest through year 30.

Where to Purchase

  • Unfortunately, we aren’t able to purchase them inside your investment accounts. I Bonds can only be purchased directly through the US Treasury.
  • Here is the Link to open an account with the US Treasury: Treasury Direct Application where you can then purchase them.

Downsides

  • Locked up for at least 1 year
  • Only purchase through US Treasury. Hassle factor of setting up multiple accounts for each entity (individual, LLC, trust).
  • Capped dollar amounts per year.
  • Unknown future interest rates. Rates could drop back down.
  • Penalty between years 1-5.

I Bonds aren’t right for everyone and may not fit into your financial plan or your liquidity needs but we want to keep you informed so you know what’s available. If you have any questions about I Bonds please let us know at 561-284-8999 or reach out to Josh Davis at josh@davisprivatewealth.com.

October 1, 2018 In Financial Planning, Investments

Fee-Only vs. Fee-Based Financial Advice

Fee-Only

Financial Advisors that are Fee-Only are paid directly for their services by their clients. They can be paid either as a percentage of assets they manage, a fixed planning fee, or hourly fees. Fee-Only planners are only paid from their clients. They can charge a one-time fee or an ongoing fee for their services.

Fee-Only advisors have fewer conflicts of interest because they are only paid by the client and their interests are aligned with the client. They only worry about the client’s needs as a result. Fee-Only advisors cannot accept any compensation because of product sales and therefore makes working with them more transparent for clients.

 

Fee-Based

Fee-Based financial planning may sound like Fee-Only but is significantly different. The main difference is that Fee-Based advisors can accept commissions from financial products, annuities, and insurance products that they sell their clients. There tend to be a lot of conflicts of interest for the financial advisor. Fee-Based advisors may do some fixed fee planning but also sell commission-based products alongside the planning fee. There tends to be less transparency with Fee-Based advice.

 

*Davis Private Wealth is a Fee Only Financial Planning firm in Wellington, Florida. As a Registered Investment Advisory firm, we have a fiduciary duty to all of our clients.