It’s a Great Time to Buy I Bonds

It’s pretty rare that I get excited about investing in anything other than low-cost index funds. But today, I am excited.

Why?

Because there is a savings opportunity available that almost no one had heard of until recently. It’s backed by the US federal government, can earn interest tax-deferred and is actually keeping up with the current high inflationary environment, meaning unlike cash, it is not quickly losing its purchasing power as prices soar.

What is it?

It’s called a Series I savings bond, and is commonly referred to as an I bond. Here’s what you should know about I bonds and how to take advantage of them.

When you invest in an I bond, there are two components to earning a return on your investment:

1. A set interest rate over the life of the bond (currently 0%, which is where it has been for any I bonds issued after May 1, 2020).

2. An adjustment for inflation, which occurs every six months (currently 9.62%).

Between now and Oct. 31, the current inflation rate component is 9.62%. Beginning Nov. 1, it will adjust based on inflation numbers for April to September 2022. These are reported each month under CPI-U data released by the US Bureau of Labor Statistics.

There are a number of factors you need to consider before purchasing any I bonds:

• They can’t be redeemed for at least 12 months. So this is not an appropriate place to invest any funds that you know will be needed within the next year.

• If you cash them in within the first five years, you forfeit the previous three months of interest. If you plan to hold them for only about 12 months, you would effectively only earn about nine months of interest over that 12-month period given this early withdrawal penalty. But even with this penalty, your effective return would be at least 4.81%, and that assumes no inflation from April to September, which is unlikely. Not too shabby compared to the 0.01% to 0.85% that most savings accounts and CDs are paying right now!

• You can only purchase up to $10,000 per person, per year, with a minimum purchase of $25. Up to an additional $5,000 can be purchased through your federal tax refund, if applicable. Plus some trusts and estates qualify as additional qualifying entities, as well as certain businesses. You can also purchase I bonds for children under age 18. So a married couple with two children, separate revocable living trusts, at least a $5,000 federal tax refund, and a qualifying business may be eligible to purchase up to $75,000 of I bonds in one calendar year. (Note that you should speak with a qualified attorney and/or tax professional to help you determine whether it is appropriate to purchase investments in the name of your children, as it may require a gift tax return and/or create tax filing requirements for them.)

• You can’t invest in I bonds using your IRA or other retirement savings plans.

To invest in I bonds, you first need to open an account at TreasuryDirect. This is where you’ll select whether you’re opening it for an individual, business, estate or trust. It will then ask you to:

• Complete information about yourself

• Choose a security image

• Create a password

• Answer at least a few security questions.

• Link a bank account. Note that since changing a bank account requires new paperwork, try to choose a bank account that you plan to keep long-term.

After completing this information, you’ll receive an account number by email. This is needed to log in to your new account. The system will send you a one-time password to your email, which you can then use to manually type in on an archaic-looking virtual keyboard like this (I’m showing it to you below so you know what to expect):

If you’ve made it this far, congratulations! You’re almost there.

Next you will go to the “BuyDirect®” blue tab at the top toolbar once you have logged into your account. Select “Series I – An accrual-type security with a combination interest rate of a fixed and an inflation rate.”

You can then add information about the owner, beneficiary (only one is allowed and it must be a person, not a trust) and select the purchase date.

Tip

Joint accounts are not supported by TreasuryDirect. This means if you want to purchase I bonds for a spouse, they will need to set up a separate account for this.

Unlike some other bonds, you have flexibility on when the income will be taxed. You can either:

• Report the interest and pay taxes on it each year, or

• Wait and report the interest when you: Redeem it; transfer ownership; or the bond matures, which is in 30 years from the original purchase date.

They are not taxable at the state level, only for federal income tax.

Also note that you can potentially exclude taxable income on I bonds for education planning if all of the following apply:

1. You cashed in the bonds the same year you paid qualified higher education expenses for yourself, your spouse or your dependents.

2. Your filing status is not married filing separately.

3. Your modified adjusted gross income (MAGI) is less than $83,200 for single, head of household, or qualifying widow(er)s or $154,800 for married filing jointly.

4. You were 24 or older before your savings bonds were issued.

See IRS Form 8815 for more information.

Yes! You can purchase I bonds as a gift for anyone, just like other savings bonds. To do so, both you and the recipient must have a TreasuryDirect account. You also need to know the recipient’s full name, Social Security number or taxpayer identification number and TreasuryDirect account number. Gift I bonds need to stay in your account for at least five business days and can then be gifted at your discretion.

As with all investing, I bonds have risk. While the current rates are incredibly attractive, I bonds should only be considered if you are comfortable not having access to the funds for at least 12 months and you have cash or other investments to spare. You need to also be comfortable having “virtual” bonds, as paper bonds are no longer issued unless you purchase them with your federal tax refund.

And while the U.S. government has never defaulted on debt or missed a payment, if the government ever collapsed you might have trouble redeeming them (although in that case, we’d probably have bigger problems to worry about).

Within your TreasuryDirect account, your I bonds should show their current value for any electronic bonds you own. Note that during the first five years, the last three months of interest will not be reflected in the current value due to the three-month early withdrawal penalty.

For paper I bonds, the best resource is to use TreasuryDirect’s Savings Bond Calculator.

For electronic I bonds, all you need to do is log in to your TreasuryDirect portal, go to the ManageDirect tab and select the link for “Redeem Securities” within the “Manage My Securities” section. Any bonds eligible for redemption should show up for you to redeem.

For paper I bonds, you should be able to cash them in at your local bank or send them to Treasury Retail Securities Services along with FS Form 1522 using the address listed on page 4 of the form.

As I mentioned before, you should only consider buying I bonds if you don’t need the money you will be investing for at least a year. And at some point, hopefully inflation will decrease and therefore I bond returns will decrease. In that case, I bonds may not be an attractive investment option since as of right now they effectively have a real rate of return (the rate of return above inflation) of zero.

For the right people, though, I bonds can be a great addition to your overall financial strategy.

This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.