US Treasury Series I Savings Bonds (“I Bonds”) currently offer an attractive opportunity for savers to take advantage of nearly risk-free return yields of more than 7%. If there is a silver lining in the current inflation cloud it is that I Bonds yields also rise with inflation, which has led to a recent surge in their popularity from relative obscurity. This presents an opportunity to invest your extra cash at a great yield, but you need to act by April 28 to lock in at the great rate.
Here’s what you need to know if you’d like to purchase I Bonds:
- I Bonds have a 30-year maturity and are priced every six months, comprised of a Fixed Rate (set for the 30-yr life of the bond purchased) and an Inflation Rate (which adjusts every six months for all I Bonds ever issued). The combined rate is called the Composite Rate.
- Example: I Bonds purchased between November 2021 and April 2022 will yield an annualized 7.12% (0% fixed rate + 3.56% inflation rate for the six months period of May – October 2022 equals 7.12% annualized). This is the highest rate at issue for I Bonds since 2000.
- In November, the new inflation rate (likely to be 9.62% annualized, or 4.81% x 2, based on the recent CPI readings) will start paying out for the next six months through March 2023.
- Note that the value of an I Bond cannot go down. If the six-month Inflation Rate adjustment should ever be negative (as was the case in 2015), then the Fixed Rate would increase such that the Composite Rate is at least 0%.
- To buy I Bonds, you log in directly to TreasuryDirect.gov and create an account and link it to your bank account.
- We are not able to purchase I Bonds on your behalf. They must be held directly in a Treasury Direct account established by you. They cannot be held in your Schwab or Fidelity accounts as part of your BAM or other portfolios.
- Note: the website experience is not very modern, rather it looks straight out of the 1990s, but it is a straightforward process to setup an account and link to your bank. Shouldn’t take more than 15-20 minutes from start to finish.
- Further details about the account setup process are here on the Treasury Direct website.
- There is a $10,000 limit per person per calendar year. An additional $5,000 can be purchased when you file your taxes and use your refund if applicable. Trusts and Businesses can buy up to the $10,000 per year too. So, a married couple with a Trust or Business and a federal tax refund greater than $5k could buy up to $35,000 per year of I Bonds theoretically.
- You could buy I Bonds as gifts for family members too. The $10,000 cap is per recipient, not buyer.
- Registration is done at the Holdings level, not at the Account level, meaning for each purchase you could choose how you'd like to register (Sole Owner, Primary/Secondary, Beneficiary/TOD, Trust, Business)
Some additional points to keep in mind about I Bonds:
- You don’t pay any state or local taxes on I Bonds, and federal income tax can be deferred until redemption. Makes these especially attractive for those living in high-cost areas.
- If you use these bonds to pay for education expenses, they are tax-free.
- You cannot cash in these bonds in the first 12 months, called the “illiquidity” period. Therefore, I Bonds are not a great option for cash needs during that time.
- If you cash in before 5 years, you pay a penalty of 3 months’ worth of interest owed.
- After 5 years you can redeem penalty-free at current value.
For clients looking for a place to park extra cash at a great yield, I Bonds are a really compelling option to consider right now. If interested, please go to TreasuryDirect.gov before April 28th to setup your account(s) and lock in the initial 7.12% return. It may take a day or so for the bank link to establish and funds to transfer, so don’t delay.
If you miss the April 28th deadline, you can still purchase I Bonds, and still get the higher annualized rate to be set May 1st, but we don’t know with any certainty what future inflation will be beyond that. Inflation could revert back to lower levels and thus future I Bond rates will also come down. Since you must hold for at least 1 year, you are better off to capture the highest rates you can during this period.
If you’d like to learn more or explore your situation further, please don’t hesitate to reach out to us.