As inflation continues to rise, a long-ignored government savings bonds could be a big deal right now.
Inflation-adjusted savings bonds, known as I Bonds, are 30-year bonds with an interest rate that changes every six months based on the country’s main indicator of inflation, the consumer price index (CPI). (The CPI for April, which was release on Wednesday, show prices rising at an annual rate of 8.3%).
Right now, the I Bonds are paying an annual rate of 9.62% through October, which will result in a yield of at least 4.81% over the next six months and probably higher if inflation stays high.
That interest rate is the highest the I-Bonds have paid since they were launch in 1998, and far exceeds recent rates on one-year certificates of deposit (CDs), which recently averaged 0.23%, and of online savings accounts, which can pay up to 0.60%.
“Even if inflation stabilizes, I-Bonds should still pay competitive rates over the next year or two,” says Ken Tumin, principal industry analyst at Lending Tree and founder of Deposit Accounts, a website that tracks savings returns. .
Savers took this into account. Sales of I Bonds grew to more than $9 billion during the six months ending in April, compared with just $1 billion in all of 2021, data from the US Treasury department show.
Still, I Bonds have some drawbacks to be aware of, such as having to invest the money over 5 years, confusing rate formulas, and limited options for purchasing the bonds.
How the Bonds I work
Like regular savings bonds, I Bonds pay monthly interest, beginning on the first day of the month in which the purchase is made. So if you buy a bond at the end of the month, you’ll earn the entire month’s interest, says Allan Roth, a certified public accountant and financial planner in Colorado Springs, Colorado.
Interest accrues for 30 years or until you sell the bond. (As with regular savings bonds, interest is not pay separately.) Taxes on interest can be deferr until you withdraw the money.
Calculating the interest you’ll earn can be tricky, because the I Bonds actually have two rates, which reset semi-annually in May and November. There is a fixed rate that lasts for the life of the bond you buy. This rate, which is set by the United States Secretary of the Treasury, has remained at 0% for the past two years. During 2019, the rate was set at 0.50% and 0.20%.
I Bonds also have a variable rate, which depends on CPI fluctuations during the months prior to the reset date. As stated before, that rate now stands at 9.62%.
Investors who bought bonds between November last year and April 2022, when the floating rate was 7.12% annualized, and held them until October will earn 8.54% over 12 months, Roth says. On a $10,000 investment, that profit would reach $854. People who bought bonds when the fixed rate was higher will earn even more.
I Bonds have some restrictions. You cannot make a withdrawal during the first 12 months after the purchase. In addition, if you sell them during the first 5 years, you will pay a penalty of three months of interest.
A key advantage of bonds: You can defer taxes on the interest you earn until you sell it. At that time, you will have to pay federal income taxes, but the I Bonds are not subject to state or local income taxes. (You can also choose to declare interest each year.)
For those paying for college, you may be eligible for an education tax exemption that will allow you to exclude some or all of the interest on the redeemed I-Bonds from federal income tax.
How to buy Bonds I
In most cases, to buy I Bonds you must open an account on the government’s TreasuryDirect website. There is an annual limit of $10,000 per person to purchase I Bonds. (In the case of married couples, each spouse may purchase these bonds for up to $10,000.)
But if you’re entitle to a tax refund, you can buy up to $5,000 more by electing to receive some or all of that refund as I Bonds. You’ll receive those bonds as paper certificates, which you can convert to electronic format.
If you buy I Bonds through TreasuryDirect, you can invest as low as $25. For tax refunds, purchases are make in $50 increments. If you buy online, you can invest any specified amount, down to the last penny, up to a maximum of $10,000. For paper bonds, you can purchase in increments of $50, $100, $200, $500, and $1,000.
It is possible to purchase additional I Vouchers to give as a gift. But you must have the recipient’s Social Security number. And the recipient must also have a TreasuryDirect account in order to receive the gift. Children under the age of 18 cannot open a TreasuryDirect account, but can hold I Bonds. Parents can open the account for themselves and link their account to the child’s, allowing them to purchase bonds in the child’s name.
Reasonable Warning: Many savers find the TreasuryDirect website to be outdate and cumbersome to use. “It might remind you of Myspace,” says David Enna, founder of Tipswatch, a website that provides information on I-bonds and TIPs (Treasury Inflation-Protected Securities).
Therefore, carrying out some tasks can be difficult. For example, if you want to change the bank checking account linked to your TreasuryDirect account, you must print a form, take it to the bank, and obtain a signature certification.
The US Treasury Department is developing an upgrade to the website to offer users “a positive customer experience,” says John Rizzo, a spokesman. However, a timetable for the website renovation has not been announce.
Track your Bonuses I
You can monitor your I Bond purchases through your TreasuryDirect account, which will display the value of your current holdings. For those of you who have paper bonds, you can use the Treasury Savings Bond Calculator.
Please note that you will not receive periodic statements on your TreasuryDirect account as you would with brokerage or bank accounts, although you will receive a 1099 tax form if you cash in your securities.
That’s why financial planners recommend telling trusted family members about your account and mentioning it in your estate plan in case you can no longer manage it yourself. Another possibility is to designate an heir to the account, who could redeem the money if you die.
