Fight inflation with Series I bonds
Even with interest rates on savings accounts and certificates of deposit climbing following the Federal Reserve’s interest rate hikes, the composite rate of 9.62% on US savings bonds newly issued I series is hard to ignore. This composite rate consists of a fixed rate, which is currently 0% on new bonds, and an inflation rate, which is based on the government consumer price index and adjusts all six months from the date of issue of the bond. This rate has transformed the once dormant Series I savings bond, with sales of millions of dollars) into the latest hot commodity, with sales of billions. (Okay, hot security.)
Consumer prices rose 1.3% between May and June, up 9.1% from a year earlier, the biggest increase in 31 years. Prices have risen across the board, with everything from eggs to rents rising. Kiplinger expects inflation to stay around that level for the rest of 2022. If you’re thinking, that’s a lot of numbers that don’t quite match what the bond is currently paying, we get it. While the bond rate-setting process is extremely simple (at least, if you’re an economist at the Bureau of the Fiscal Service), what each bondholder earns over the long term depends on when you buy the bond. .
That’s to say, if you can buy an I-bond. There are two ways to buy an I-bond these days, but one is so obscure that if you hadn’t already planned it as part of your 2021 tax return, you’ll have to wait until April. next (more on that later). Most people looking for a Series I savings bond will need to use – or create – a TreasuryDirect account to buy savings bonds electronically.
Be careful with TreasuryDirect
TreasuryDirect’s somewhat archaic software requires you to move deliberately. Users have found the site buggy and unforgiving, and – something we’ve personally experienced – you can forget to get help over the phone. Treasury Department officials say they are working on fixes, including an overhaul of TreasuryDirect. In the meantime, our advice:
If you are opening a new TreasuryDirect account:
- Have all your information handy, including the bank account you want to link (routing and account numbers)
- Link a bank account that you plan to use for a while
- Don’t try to use a password manager
- Don’t be in a hurry; incorrectly typed characters may be impossible to correct
Series I bonds have drawbacks
You cannot redeem an I bond during the first year period. If you cash it in before five years have passed, the penalty is the last three months of interest before redemption, which is considerably less severe than the early withdrawal penalties on most five-year CDs. Even if you pay the penalty, “you’ll probably be way ahead of what you would be if you had just earned the standard interest rate on your bank savings account,” says Matt Hylland, a financial planner in Cedar Rapids, Iowa. . A savings account or money market deposit account is the best choice for money you might need immediate access to, like an emergency fund, but I bonds can fit well into a reserve longer-term savings.
Despite the 9.62% rate (for now), you’re not going to get rich on savings bonds. The main reason is that the government has imposed a low cap on this program. Each calendar year, each individual can purchase up to $10,000 in electronic I bonds at treasurydirect.gov, plus up to $5,000 in paper bonds with your federal tax refund (this is the arcane method; we we will come back to this later). So a married couple can purchase up to $20,000 electronically and $10,000 on paper.
Also keep in mind that the inflation rate you receive will reset every six months and the underlying fixed rate is zero. It’s not only possible that a Series I bond will pay zero, zilch, nada – it happened: in 2009, when consumer prices were falling. By law, the rate cannot go below zero. But remember, you can redeem your bond after one year, and to avoid the modest penalty, just wait five years.
Are Series I bonds tax-exempt?
You pay no state or local income tax on the interest, and you can defer federal income tax until you repay the bond or it matures after 30 years. And even federal liability can be waived if the proceeds are used for qualified education expenses, but this process has income limits, requires careful planning, and has other important regulations you can learn more about from TreasuryDirect and IRS Publication 970 – Tax Benefits for Education.
How can I buy more than $10,000 of Series I bonds per year?
In the past, all savings bonds were issued on paper. The program, in fact, dates back to the Great Depression, and President Franklin D. Roosevelt was the first to purchase what became known as the “baby bond.” Savings bonds became war bonds and were huge during World War II. Despite this history, marketing costs money, and in an effort to cut costs, the Treasury Department has converted to digital sales (via TreasuryDirect), with one exception.
If you would like to purchase up to an additional $5,000 of Series I Savings Bonds each year on top of the $10,000 per year you have already purchased, you can do so. But only by applying your tax refund to it. And these will be published in hard copy, with Helen Keller, Chief Joseph or George C. Marshall on them (among others). You can even designate a beneficiary or co-owner through this program, which you can find out more about from the IRS. So increase that withholding at work, or plan to pay some extra money to the IRS when you file next year — basically, by pre-funding your bond purchase.
If you really want to get started, you can buy bonds in the name of your children (they must be under 18 and purchases should be treated as gifts, an important distinction) or in the name of entities you control, such as as trusts or LLCs. Remember, however, that each will need to have their own TreasuryDirect account, so the caveats about careful administration apply.