As we’ve all no doubt noticed, inflation has reared it’s head in the US for the first time in many years. Because of that Series I Bonds have become a hot topic on social media and various finance articles I’ve read. Below is a who, what, where, and when on these bonds.
I Bonds are US savings bonds that protects the bond value from inflation. They are generally referred to as “risk free” since they are backed by the US Government. The bond’s yield is a combination of a fixed rate that doesn’t change once you purchase and a fluctuating inflation rate that changes every 6 months. The current yield on I Bonds (May thru November 2022) is 9.62%!
I Bonds must be purchased through the US Treasury’s website: Treasurydirect.gov They can not be purchased through a bank or any brokerage/investment account. Keep in mind that this is a government website. That means it won’t be super user friendly and can be frustrating to set up and access.
Individuals can purchase only $10k per year. Married couples could each purchase the maximum and you can purchase them in the name of children. If you have a business you generally can purchase $10k annually in the name of the business as well. Taxpayers are also permitted to use $5k of a tax refund on their return to purchase an I Bond.
Bonds can be cashed in after 12 months. However, any bond redeemed before 5 years is subject to a loss of the last 3 months of interest. The bonds continue to earn interest until full maturity at 30 years. The interest earned on these bonds is taxable federally but NOT to any states. Tax can be paid on the interest annually (via election) or when you cash the bonds in or it matures.
These bonds are perfect vehicles for funds that you don’t mind tying up for a medium term time horizon (or more). Because of the interest lost if you cash the bonds in before 5 years that limits their attractiveness, at least somewhat, for shorter periods. One idea would be to use funds currently being used for additional mortgage or low interest rate loans and funnel the funds into I Bonds. Earning 9+% on your money while paying below 5% say on a mortgage is a huge win over the long term. Who knows how long the I Bonds will pay this rate but if you are interested in a place to earn risk free interest they are certainly worth a look.
If you have any questions, please feel free to contact us.