05 May 2022 Series I Savings Bonds Paying 9.62%
I can’t think of many good things to say about the high rate of inflation we’re currently experiencing in our economy. That’s why on Monday, when the Department of the Treasury announced that Series I savings bonds are now paying an annual rate of 9.62% through October 2022, I knew I had to write about them. Finally, a shred of good news to report on.
9.62% is the highest yield for I Bonds since they were first issued in 1998. It’s not often that government bonds are one of the more talked about investment tools in the world of personal finance so I thought it might be good to take a look at what I Bonds are, how they work and how they might be used.
I bonds are issued by the federal government. They pay a fixed rate of interest that is set by the Treasury Department, plus an inflation-adjusted rate that is determined by the change in the Consumer Price Index (CPI) over the previous six months. Due to the recent dramatic rise in the CPI, I Bonds are now offering a very attractive yield. And because they are backed by the full faith and credit of the U.S. Government, they carry very little risk of principal loss. Seems like a pretty good deal, so how do they work?
- You purchase them directly from the U.S. Government at Treasury Direct. You can purchase up to $10,000 per person, per calendar year. You can also purchase an additional $5,000 by sending your tax refund directly to Treasury Direct. Note: Under this method you’ll be sent actual paper bonds!
- The yield consists of two parts. A fixed component, currently 0%, that remains constant throughout the 30-year life of the bond, and an inflation-indexed component tied to CPI that resets every 6 months in May and November. The second component is currently where the full 9.62% is derived.
- The interest on I Bonds compounds semi-annually but you don’t pay any federal or state tax until you redeem your bonds. In addition, if you happen to be in a lower tax bracket in the year you redeem your bonds and you use the proceeds to pay for education expenses the interest could be tax-free.
- You cannot redeem your I Bonds in the first 12 months and if you redeem them within 5 years of your purchase date you pay a penalty of 3 months’ interest. After 5 years you can redeem your I Bonds penalty-free.
As the saying goes, there’s no such thing as a free lunch, so there are a few things to keep in mind.
- The Treasury Direct website is not the easiest to use. I mean, it’s a government website! In fact, I’m currently locked out of my Treasury Direct account – I’ll tackle that when I get some time.
- You can only buy $10,000 per person, per calendar year. Yes, if you’re married, your spouse can buy $10,000, too, but they have to have their own Treasury Direct account. Note: you are able to buy I Bonds as a business or in a custodial account for your kids but this is a bit more complex, so make sure you know what you’re doing.
- As I mentioned above, you can’t redeem your I Bonds in the first 12 months and if you redeem them within five years, you’ll forfeit the last three month’s interest.
- Also, note that the variable component of the interest rate can decrease every six months depending on any changes to the CPI.
- And unfortunately, you can’t buy I Bonds in your traditional or Roth IRA or your 401(k).
Those are the ins-and-outs of I Bonds. You might consider using them if…
- You have cash sitting in a bank savings account or CD (even if you have to pay a penatly to get out) that you aren’t planning to use for more than 1 year.
- You need to park some cash for an upcoming purchase at least a year out but not far enough out to invest the money in the stock market. Perhaps a wedding or home purchase.
- Your kid’s college is coming up in two or three years and you’re currently funding a 529 plan.
- You are paying extra on your mortgage. You could buy I Bonds instead for a few years and then use the cash from redeeming the bonds to pay down your mortgage a bit later.
- I suppose you could park part of your emergency account in I Bonds. Just make sure that you still have plenty of other dollars set aside since you won’t be able to redeem your bonds for a full 12 months.
I’m sure there are more ways to use I Bonds as a part of your personal finance strategy. In fact, I’d love to hear from you if you have other ideas. And as with any investment tool or product, it’s best to implement I Bonds within the framework of your big picture financial plan and (even though they can’t buy them for you) with the guidance of your financial advisor or CPA. Let us know if we can help.
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