Hefty I bond yields

Are I bonds decent investments? — H.R., Binghamton, New York

A. They’re worth considering, and they’re particularly attractive now because the interest rates paid by I bonds are tied to inflation.

The rates have two components: a fixed rate that lasts for 30 years and an inflation rate that changes every May 1 and Nov. 1. The fixed rate is currently only 0.4%, but with inflation so high lately, the total interest rate is 6.89%, which applies during the first six months you own the bond and then changes with inflation thereafter.

I bonds can defend your investment against inflation. When inflation is high, they can pay more than many other alternatives, such as certificates of deposit.

Q. I heard that when you buy stocks, you have to buy at least 100 shares. True? — G.A., Norfolk, Virginia

A.

Nope. You can buy as little as a single share of a stock — and possibly less.

Back when many brokerages charged $25 or more per trade, it wouldn’t have been wise to pay $25 to buy, say, a $40 stock. Lots of major brokerages are charging $0 per trade these days, though, so it’s easy to buy small numbers of shares.

Meanwhile, if you’ve been able to direct your brokerage to reinvest your dividends into additional shares of stock (many will do so), you’ll often be receiving fractions of shares. A $5 dividend, for example, will get you 0.33 shares of a $15 stock.

Keep in mind that you may need to be able to account for the shares you buy or receive, knowing your cost basis in order to calculate taxable gains (or losses). If you’re buying and selling in a retirement account, you generally won’t need your cost basis.

Roth retirement accounts for the win

Millions of Americans have various retirement accounts available to us — most typically, IRAs and/or 401(k)s. Both of those come in two main varieties: traditional and Roth.

It’s valuable to understand the difference as one kind of account may serve you much better than the other.

Traditional IRAs and 401(k) s offer upfront tax breaks; you fund them with pretax dollars. So, for example, if you contribute $6,000 to your traditional IRA, your taxable income shrinks by $6,000, and you avoid paying taxes on it in the year of your contribution. If your tax bracket is 24%, you’d save $1,440 — 24% of $6,000. The money in your account is eventually taxed, though, when you withdraw it.

With Roth IRAs and 401(k) s, you get no upfront tax break; you contribute post-tax dollars. So if you sock away $6,000 into a Roth IRA, it doesn’t affect your taxable income. But if you follow the rules, you’ll eventually be able to withdraw funds from your Roth accounts tax-free. That can be a big deal. If you contribute regularly (and, ideally, generously) to Roth accounts for many years and your investments do well, you can end up with hefty nest eggs at retirement that you can tap without taxes.

Roth accounts can be good for those who have many years in which to grow their accounts and for those who expect to be in higher income tax brackets in retirement.

It’s too late to make a 2022 contribution to your 401(k), but 2022 contributions can be made to IRAs until the deadline for tax returns, which is April 18 in 2023. IRA contribution limits for 2022 are $6,000, plus a $1,000 “catch-up” contribution for those 50 or older. Those limits are $6,500 plus $1,000, respectively, for 2023. For 401(k) accounts, the contribution limits are much more generous — $22,500 in 2023, plus an additional $7,500 for those 50 and older, totaling $30,000 for 50-somethings and older folks.