With current inflation at levels not seen since the early 1980s, Series I Savings Bonds (I Bonds) have attracted a lot of attention. For those with excess cash in the bank over and above an emergency fund (3 - 6 months expenses), I Bonds are worth strong consideration given current low/rising interest rates and higher than normal inflation.
I Bonds are offered by the U.S. Treasury Department. They are backed by the full faith and credit of the U.S. government. Unlike most other investments, I Bonds can only be purchased through the Federal Government’s TreasuryDirect website. I Bond purchases are limited to $10,000 per year for each individual (social security number) or entity (trust or business). You may also obtain a paper I Bond up to $5,000 per year as an alternative to cash if you have a refund on your federal tax return.
I Bonds have a 30-year maturity in which they will earn interest over 30 years. They must be held for 12 months (1 year) before they can be cashed in. If they are cashed in before 5 years, 3 months interest would be subtracted from the proceeds. The interest can be reported for tax purposes annually or deferred until the bond is cashed in or matures. The tax deferral of interest is a positive feature of an I Bond allowing investors to control when they are taxed on the interest earned.
The interest rate of current I Bonds is what makes them so appealing right now. The rate is comprised of two components – a fixed rate and the inflation rate. These two rates combined form the composite rate which is the amount of interest the I bond will earn over a six-month period.
- The I Bond fixed rate, currently 0%, is established by the Treasury on the first business day of May and November (every 6 months). This rate is fixed for the life of the bond.
- The I Bond inflation rate, currently 7.12% (November 2021 through April 2022), is variable and changes every 6 months based on inflation via the Consumer Price Index.
When you purchase an I Bond, you lock in the current composite rate (fixed + inflation rate) for the following six months. After six months, the most recent previously announced composite rate would take effect for the next six-month period. It is anticipated that we could see an inflation rate around 9% in May based on the recent monthly trends.
If an I Bond is purchased today with a 0% fixed rate and inflation were to register a negative figure in the future, the composite rate for the following six-month period would be 0% as the composite rate cannot go below 0%.
- At the current composite rate of 7.12%, even if the composite rate was 0% in the following six-month period, the annual return for the first year would be 3.56%.
- At the current composite rate of 7.12%, if the composite rate was 9% (anticipated for May) in the following six-month period, the annual return for the first year would be 8.22%.
When you buy a savings bond on the Treasury Direct website it becomes effective the next day. Because April 30th falls on a weekend, the last day you can buy an I bond during the current period is on Thursday, April 28th. While we can’t know what the rates will be in November 2022, we do know the current composite rate is 7.12% for the first six-month period if purchased now through April 28th. Current monthly inflation numbers also indicate the May composite rate is expected to be around 9% which would apply to the 2nd six-month period.
It is important to keep in mind that I Bonds are not liquid for the first year of ownership. This is why we don’t recommend them unless you have cash savings over and above an emergency fund. It would also not make sense to withdraw funds from an IRA where you would have to pay taxes on the withdrawal in order to purchase I bonds.
While I Bonds have been offered by the federal government since 1998, their appeal has gained traction over the last 6-12 months as bank savings interest rates have remained low and inflation has been rising. As interest rates rise and inflation comes down to more normal levels, they will likely lose their appeal but for now they seem like a solid opportunity for at least a 12-month period for those with excess cash.
If you would like to discuss or learn more, schedule a call or meeting with me using the link below:
Tripp Yates, CPA/PFS, CFP®
Tripp’s passion for financial planning is evident to each and every client he meets with. His desire is to help his clients organize their finances, reduce taxes, and invest wisely. As a fee-only fiduciary advisor, Tripp strives to work in a humble and transparent way.
With extensive experience in financial planning and investment management, Tripp diligently uses his credentials of CPA and CFP® to benefit his clients. Over the last ten years, he has managed over $100 million in assets for individuals and families. In 2017, he founded Eaglestrong Financial, specializing in helping dentists and business owners. Outside of work, Tripp enjoys running, spending time with his family, and cheering on his favorite sports teams. He is an active member of Harvest Church.
Eaglestrong Financial, LLC is a Registered Investment Advisor offering advisory services in the states of TN and MS and in other jurisdictions where exempted. The information contained herein is not intended to be used as a guide to investing or tax advice. This material presented is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Past performance is no guarantee of future results.
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