There are a lot of people asking about I Bonds right now. With inflation pushing over 8%, an interest rate for the I Bond will rise to nearly 10% in May.
Being backed by the US Government, savings bonds offer a guaranteed return, but the rules can seem a little complicated. Part of the article bellow is credited to and originally seen on Wall Street Journal.
By Veronica Dagher
iStock image
April 21, 2022
I Bonds are inflation-adjusted U.S. savings bonds. Americans snatched up nearly $11 billion in these bonds over the past six months, compared with around $1.2 billion during the same period in 2020 and 2021, according to Treasury Department records. That figure will likely rise even higher when the interest rate jumps next month.
But understanding how, when and how much of these bonds to buy can get tricky. For example, you don’t want to face any early withdrawal penalties.
To help untangle the rules and strategies for making the most of I Bonds, here are answers to some of the most frequently-asked questions posed by Wall Street Journal readers.
When is the best time to buy I Bonds and should I purchase my entire $10,000 annual allotment all at once?
The interest on U.S. Treasury Series I Bonds is currently 7.12% and will rise to about 9.6% beginning in May. There is a $10,000 annual limit per person for I Bonds, yet there are certain strategies to exceed that ceiling.
The I Bond interest rate is based on a calculation tied to the consumer-price index. Prices rose by 8.5% year over year in March, the fastest pace since December 1981, according to the Bureau of Labor Statistics.
Some economists say inflation may have peaked, and if that is the case, the interest rate on I Bonds might start to fall as the rate of inflation falls.
I Bonds will be subject to at least one rate change in a 12-month period. Elliot Pepper, a financial planner in Baltimore, doesn’t know what the next rate after 9.6% will be. So, he’ll try to mitigate the risk that it will be lower than 7.12% by taking half of his annual limit and “locking in” the combined 7.12% and 9.6% and then buying the remaining $5,000 in late October, when he has more visibility about the next rate.
If the rate then is lower than 7.12%, Mr. Pepper said he would have been better off investing his $10,000 maximum before May. If the rate is higher than 7.12%, he would have been better off buying the bonds after May, he said.
When is I Bond interest paid?
Interest is paid in a lump sum when the bond is cashed.
An I Bond earns interest monthly from the first day of the month in the issue date, so if you purchase a bond on April 20, you would get interest for the entire month of April, said Pamela Ladd, senior manager for public accounting for the American Institute of Certified Public Accountants.
The interest, which is compounded twice a year, accrues for up to 30 years or until you cash the bond, whichever comes first, said Ms. Ladd.
For instance, if you bought an I Bond for $10,000, the principal value is $10,000. If after six months, you have earned about $356 at an interest rate of 7.12%, then the government will add that to your principal value and the next six months you will earn interest at an annualized rate of about 9.6% on roughly $10,356, said Mr. Pepper.
How do I go about buying an I Bond?
With inflation hovering near 40-year highs, some investors are looking for alternative ways to weather the storm. For many, a Series I Savings Bond is just the ticket. I Bonds give investors a rate of return plus inflation protection and are backed by the U.S. government. I Bonds are pretty simple to set up. You can go to TreasuryDirect.gov and open a free account to purchase these federally-backed securities directly from the U.S. Treasury.1 Here’s how to get started. |
1. Gather your info. Make sure you have the following close at hand: your taxpayer identification number, current address, checking or savings account information, and email address. |
2. Go to Treasurydirect.gov's account creation page. Navigate to the bottom of the page and select “Apply Now” on the left. This will begin your account creation journey. Next, you will choose between an Individual or Entity account. Select Individual account type (it’s the default option) and click “Submit.” |
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3. Enter your info. Using the information gathered in step 1, fill in the fields requested and check the box at the bottom to certify your Taxpayer Identification Number. Click “Submit.” |
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4. Select a personalized image. Take some time here to select an image and caption you will remember. Think of this as a visual password for your account. Click “Submit.” |
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5. Secure your account. Select your password and security questions on this screen. Make sure the answers to your security questions are impossible to guess but easy to remember. Click “Submit” to move to the final step. |
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6. Check your email. Finally, look for your TreasuryDirect account number in your email. You’ll need this to log into your account later.2 |
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You can begin purchasing I Bonds now that you’ve created your account. Here are a few things to keep in mind. I Bonds earn interest for 30 years unless you cash them in. You can do this after a year has passed from the time of purchase, but you'll lose the previous three months of interest. However, there is no penalty if you let them mature for five years or more. The maximum amount you can invest is $10,000 total per calendar year.3 Questions about I Bonds, or anything else financial? Feel free to reach out anytime. |
1. Treasurydirect.gov, 2022 2. Treasurydirect.gov, 2022 3. Treasurydirect.gov, 2022 |
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. |