https://www.treasurydirect.gov/
What are I Bonds?
Series I Bonds are issued by the U.S. Treasury and pay interest using a composite rate (composed of a fixed rate and an inflation-adjusted rate). The fixed part of the rate has been 0 for the last two years and .5% or lower for more than a decade! The inflation-adjustment is recalculated semiannually in November and May. The inflation-adjustment in November 2021 for bonds issued in the 6 months after that date was an all-time high of 7.12%!
Many experts expect the May reset to be a whopping 9.62%![i]
I Bonds earn interest monthly and the principal is adjusted semi-annually meaning your money will compound over time. The composite rate can NEVER go negative.[ii]
Though there are purchase limits per person per year you can also buy them as gifts.[iii]
What are the Tax Consequences?
Always consult a tax professional, this is not tax advice: below we have directly quoted some pertinent information from TreasuryDirect’swebsite
“The interest that your savings bonds earn is subject to
- federal income tax, but not to state or local income tax
- any federal estate, gift, and excise taxes as well as any state estate or inheritance taxes.”[iv]
“Are there tax benefits to using I bonds to finance education?
Yes. Under the Education Savings Bond Program, you might be able to completely or partially exclude savings bond interest from Federal income tax. This can occur when you pay qualified higher education expenses at an eligible institution or state tuition plan in the same calendar year you redeem eligible I bonds and EE bonds issued January 1990 and later. You aren't required to indicate that you intend to use the bonds for educational purposes when you buy them, but you must make sure the program's requirements are met; some apply when you buy the bond(s). See IRS Publication 970”[v]
What’s the “Catch”?
- You’re limited to $10,000.00 per person per year (an additional $5,000.00 can be purchased in paper I Bonds using your tax refund.)
- You must hold it for a minimum of 1 year, so they aren’t immediately liquid.
- If you hold them between 1 and 5 years you will be penalized the last 3 months of interest.
- There’s no way to hold it in a brokerage account, or IRA and there’s no secondary market, you can only redeem them from the treasury or at a bank. You can purchase them electronically at https://www.treasurydirect.gov/
What are the Takeaways?
Though you can’t buy that much at one time they’re currently an amazing safe alternative to Certificates of Deposit (CDs). Even though there would be interest penalties for redeeming them in less than 5 years, they blow away any CD rates we have recently seen. Since you can purchase them as gifts, it could be a way to help fund higher education or let some of your beneficiaries have the opportunity to enjoy some of their inheritance during your lifetime. Though no one knows for sure, inflation could be peaking, so buying them before the reset in May might be the best move, you would guarantee half of that 7.12% for the first 6 months and whatever the May reset is for the 6 months after that.
