Government I-Bonds Yielding 9.62%?!
Inflation is the current headline thief. Whether it’s gas at a national average of $4.86 per gallon, or rising food prices, we are all feeling the pinch of higher prices. As the boys devour what feels like 14 boxes of cereal a week, believe it when I say $5.99 for a box of Cap’n Crunch is starting to feel expensive!
What the news has picked up as a way to fight inflation is a security issued by the US Treasury. That is the Series I Savings Bonds (“I-Bonds”). They are currently registering the highest initial interest rate in a long time.
Series I Savings Bonds are tied to inflation and adjust every 6-months. For the period, May to October 2022, Series I Savings Bonds are providing an annualized interest rate of 9.62%.
For every $1,000, that is $96.20 in interest!
I-Bonds, may help me buy a few more boxes of cereal, but first, there are some key points you need to know.
Series I Savings Bonds
You can learn more about Series I Savings Bonds, and buy them at treasurydirect.gov. The website can be a little clunky, but seems to get better every year.
Most appealing right now is the interest rate. At 9.62% interest compounded semi-annual, it feels like you should hoover up as much as possible. Unfortunately, there is a $10,000 purchase limit per person per year. You can buy over that limit if you use your tax refund too.
Rates are based on a fixed rate plus an inflation rate. With inflation elevated right now, yields on I-bonds look extra juicy. Since inflation is variable, the rates you’ll earn on your I-Bonds also change over time.
The fixed rate is currently 0.00%. The semi-annual inflation rate is currently 4.81%. I-Bonds purchased in June will have their rates reset on December 1. You get 6-months of the prevailing interest rate when you buy in.
Interest on I-Bonds
The 4.81% inflation rate will be re-calculated on November 1. Interest is compounded semi-annually, meaning that every 6-months the interest earned is added to the bond’s value. For example, if you bought $10,000 of I-Bonds on June 1, you’ll earn $481 of interest for the next 6-months. Such that on November 30 your bonds will be worth $10,481. You’ll then earn interest on this new value.
Goods News! Changes in inflation rates affect all I-Bonds issued. That means investors that purchased I-Bonds back in 2016 at 0.00% interest, are also earning 9.62% for the next 6-months. Remember, these rates reset every 6-months. If inflation dies down, rates on I-Bonds may also drop.
I-Bonds mature in 30-years. If you buy now and wait, you’ll get your money back, plus all the interest in thirty years. Once you buy an I-bond, however, the minimum term of ownership is one year. And if you redeem before five years, you have to give back three months of interest. That’s about $240 at current rates.
Taxes on I-Bonds
Interest on I-Bonds tends to be exempt from state and local tax. It is, however, subject to federal income tax.
There are a couple options on paying federal income tax on interest earned. First, you report the interest each year and pay taxes. Second, defer reporting interest until you redeem your I-Bonds or they reach maturity.
Deferring taxes is a powerful wealth building technique, and so most people wait until they cash in their bonds to pay taxes on the interest.
One last tax benefit, is using I-Bonds for education costs. Some exclusions apply, such as MAGI limits ($98,200 for single fliers, $154,800 for married joint filers), but when you use I-Bonds to pay for higher education you can apply for an exclusion to have the interest excluded from taxable income.
Are I-Bonds right for you?
Of course, determining whether or not you should own Series I Savings Bonds will be based on your specific situation. A reason you should not run out and buy them is because of the news commenting about the high interest rates currently being offered. This will change over time.
Make sure the reason you buy I-Bonds is because it helps you meet your goals. For instance, say you want to buy a new car in five years. Well, parking $10,000 ($20,000 if married) in I-bonds today, and earning tax deferred, inflation-adjusted interest over the next five years could be a great reason to add I-Bonds to your savings plan. After-all, I-Bonds are backed by the US Government, and for all intents and purposes, as close to risk-free as you’re going to get.
Then again, we find that for many, owning I-Bonds won’t move the needle. Buying the annual limit in 2022 when your other financial assets are worth $1,000,000, it will only make up 2.0% of your portfolio.
As always, we are here to help! If you’re curious about I-Bonds and how you may use them, buy them, or just want to learn more, give us a call, we’d love to talk.
Here’s to surviving inflation,
Adam K. Wright, CFA, CFP®