Should You Purchase Series I Bonds?

Government-issued Series I Bonds (“I” for inflation) are currently available with a 9.62% annual interest rate. That’s an attractive return, and if inflation stays high, so will the I-Bond yield.

While purchasing I-Bonds could be an investment decision for some, we view I-Bonds as a cash management decision for the majority of our clients. If you carry a high checking and savings balance, I-Bonds might make sense if you’re looking to enhance your cash reserve or emergency fund strategies with some extra interest. When I-Bond rates decline, you can always take your dollars out, with some restrictions outlined below.

I-Bonds have 30-year maturities and pay a fixed interest rate (currently zero percent), which stays the same for the life of the bond. I-Bonds also pay an inflation rate based on the Consumer Price Index for all Urban Consumers (CPI-U), which includes the volatile food and energy components. The inflation rate gets reset twice a year at the beginning of May and November.

The current 9.62% annual I-Bond interest rate is active through October of 2022, but actually represents a doubling of the 4.81% current rate for the six-month period of May through October of this year. The rate is doubled to help investors compare I-Bonds to other investments, but it’s unlikely an investor will receive a 9.62% rate for an entire year.

A few more I-Bond facts

⊗ They must be held for at least one year to earn any interest.

⊗ You forfeit three months’ interest if you redeem after less than five years.

⊗ There is no secondary market for buying or selling I-Bonds.

⊗ I-Bonds cannot be held in IRAs.

⊗ I-Bonds are the only savings bonds available in paper form.

⊗ They’re exempt from state income taxes, but federal taxes are owed upon surrender.

⊗ They’re federally tax-free for those with incomes below $150,000 if used for college education.

⊗ I-Bonds can be titled individually or with a beneficiary.

How to purchase I-Bonds

There are only two ways to purchase I-Bonds:

1. Visit TreasuryDirect.gov and set up an account.

2. Buy I-Bonds in paper form with your tax refund by filing IRS Form 8888.

You can buy up to $10,000 in I-Bonds per year, per social security number*. A married couple might register a bond under each spouse’s social security number and name each other as beneficiary. I-Bonds can also be purchased in the name of a trust or entity or for minor children. You could choose to purchase $10,000 in I-Bonds for each social security number in your family, each year.

Some things to keep in mind

When buying I-Bonds for yourself or as gifts that could help your children or grandchildren save for a down payment or pay college tuition, please remember:

⊗ If I-Bonds are used for educational expenses, those expenses must be claimed on your tax return in the year in which you surrender the bonds.

⊗ I-Bonds can potentially disqualify college students from financial aid through FAFSA because they are an asset in the student’s name.

⊗ I-Bonds do not generate statements or 1099-Int forms, so be sure your significant other and heirs are aware of your Treasury Direct account.

⊗ Keep your Treasury Direct password secure.

Do I-Bonds make sense for you?

If you understand the limitations of I-Bonds and you’re comfortable with opening and maintaining an online account, they might be an attractive option for you while I-Bond rates are high. Your TGS advisor would be happy to answer your questions about whether I-Bonds make sense for your overall financial plan.

*It’s technically possible to purchase an additional $5,000 in I-Bonds (in paper form only) using your federal income tax refund for a total purchase of $15,000 in I-Bonds in a calendar year.

Further reading: TIPS Versus I-Bonds

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