There are U.S. Government Savings Bonds, called “I Bonds”, that are currently paying a 9.62% interest rate as of August 2022, you can continue to buy the bonds at that interest rate until October 2022, and then the rate resets. Before you buy these bonds, you should know the 9.62% interest rate is only for the first 6 months that you own the bonds and there are restrictions as to when you can redeem the bonds. In this article I will cover:
How do I Bonds works?
Are they safe investments?
Purchase limits
Why does the interest rate vary over the life of the bond?
How do you purchase an I Bond?
Redemption restrictions
Tax considerations
How do I Bonds Work?
I Bonds are issued directly from the U.S. Treasury. These bonds earn interest that compounds every six months but the interest is not paid to the bondholder until the bond is either redeemed or when the bond matures (30 years from the issue date).
Variable Interest Rate
Unlike a bank CD that pays the same interest rate until it matures, an I Bond has a variable interest rate the fluctuates every 6 months based on the rate of inflation. There are two components that make up the I Bond’s interest rate:
The Fixed Rate
The Inflation Rate
The fixed rate, as the name suggests, stays the same over the life of the bond. The fixed rate on the I Bonds that are being issued until October 31, 2022 is 0%.
The inflation rate portion of the bond interest usually varies every 6 months. A new inflation rate is set by the Treasury in May and in November. The inflation rate is based on the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, excluding food and energy. You can find the rates that the bonds are currently paying via this link: I Bond Rates
The total initial interest rate ends up being the Fixed Rate + the Inflation Rate which is currently 9.62%. But that initial interest rate only lasts for the first 6 months that you own the bond, after the first 6 months, the new inflation rate is used to determine what interest rate your bond will pay for the next 6 months. Your 6 month cycle is based on when you purchased your bond, here is the chart:
For example, if you purchase an I Bond in September 2022 at a current rate of 9.62%, that bond will accumulate 4.81% in interest over the next 6 months (50% of the annual 9.62% rate) and then on March 1, 2023, you will receive the new rate based on the new inflation rate. Between March 2023 – August 2023, you will receive that new rate, and then it will be recalculated again on September 1, 2023. This pattern continues until you redeem the bond.
Was The Fixed Rate Ever Higher Than 0%?
Yes, in May 2019, the fixed rate was 0.50% but the last time it was above 1% was November 2007.
Can These Bonds Lose Value?
To keep my compliance department happy, I’m going to quote this directly from the U.S. Treasury Direct website:
“No. The interest rate can’t go below zero and the redemption value of your I bond can’t decline” (Source www.treasurydirect.com)
These bonds are viewed as very safe investments.
Purchase Restrictions $10,000 - $15,000 Per Year
There are purchase restrictions on these bonds but it’s not income based. They restrict purchases to $10,000 - $15,000 each calendar year PER tax ID. Why the $10,000 to $15,000 range? Most taxpayers are restricted to purchasing $10,000 per calendar year but if you are due a federal tax refund, they allow you to buy up to an additional $5,000 with your tax refund, so an individual with a large enough federal tax return, could purchase up to $15,000 in a given calendar year.
If your married, you can purchase $10,000 for your spouse and $10,000 for yourself.
Self Employed Individuals
If you are self employed and your company has an EIN, your company would be allowed to purchase $10,000 in the EIN number.
Trusts Can Purchase I Bonds
If you have a trust that has an EIN number, your trust may be eligible to purchase $10,000 worth of I Bonds each year.
Gift An I Bond
You can buy a bond in the name and social security number of someone else, this is common when parents purchase a bond for their child, or grandparents for their grandchildren.
$80,000 Worth of I Bonds In A Single Year
Let’s look at an extreme hypothetical example of how someone could make an $80,000 purchase of I Bonds in a single year. You have a family that is comprised of two parents and three children, one of the parents owns an accounting firm setup as an S-Corp, and the parents each have a trust with a Tax ID.
Parent 1: $10,000
Parent 2: $10,000
Child 1: $10,000
Child 2: $10,000
Child 3: $10,000
S-Corp: $10,000
Parent 1 Trust: $10,000
Parent 2 Trust: $10,000
Total: $80,000
The $80,000 is just for one calendar year. If this structure stays the same, they could keep purchasing $80,000 worth of I Bonds each year. Given what’s happened with the markets this year, investors may welcome a guaranteed 4.61% rate of return over the next 6 months.
Restrictions on Selling Your I Bonds
You are not allowed to sell your I Bond within 12 months of the issue date. If you decide to sell your bond after 1 year but before 5 years, you will lose the last three months of interest earned by the bond. Once you are past the 5-year holding period, there is no interest penalty for selling the bond.
When Do You Pay Tax On The I Bond Interest?
The interest that you earn on I Bonds is subject to federal income tax but not state or local income tax but you have a choice as to when you want to realize the interest for tax purposes. You can either report the interest each year that is accumulated within the bond or you can wait to realize all of the interest for tax purposes when the bond is redeemed, gifted to another person, or it matures.
Warning: If you elect to realize the interest each year for tax purposes, you must continue to do so every year after for ALL of your saving bonds, and any I Bonds that you acquire in the future.
How Do You Purchase An I Bond?
I Bonds are issued electronically from the Treasury Direct website. You have to establish an online account and purchase the bonds within your account. Paper bonds are not available unless you are purchasing them with your federal tax refund. If you are purchasing I bonds with your federal tax refund, you can elect to take either electronic or paper delivery.
I Bond Minimum Purchase Amount
The minimum purchase amount for an electronic I Bond is $25. Over that threshold, you can purchase any amount you want to the penny. If you wanted to you could purchase an I Bond for $81.53. If you elect to receive paper bonds from a fed tax refund, those are issued in increments of $50, $100, $200, $500, and $1,000.
How Do You Redeem Your I Bonds
If you own the bonds electronically, you can redeem them by logging into your online account at Treasury Direct and click the link for “cashing securities” within the Manage Direct menu.
If you own paper bonds, you can ask your local bank if they cash I Bonds. If they don’t, you will have to mail them to the Treasury Retail Securities Services with FP Form 1522. The mailing address is listed on the form. You DO NOT need to sign the back of the bonds before mailing them in.
What Are Your Savings Bonds Worth?
If you want to know how much your savings bonds are worth before cashing them in, for electronic bonds you can log into to your online account to see the value. If you have paper bonds, you can use the Savings Bond Calculator provided by the Treasury.
DISCLOSURE: This article is for educational purposes only and is not a recommendation to buy I Bonds. Please consult your financial professional for investment advice.
