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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

 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by TGS Financial Advisors), or any non-investment related content, made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from TGS Financial Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. TGS Financial Advisors is neither a law firm nor a certified public accounting firm and no portion of this article’s content should be construed as legal or accounting advice. A copy of the TGS Financial Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

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