The portions may be small but it’s still pretty close to a free lunch.
Update as of November 2, 2022: This article was originally published on our website in August 2022. On November 1 the interest rate on I Bonds was reset and now stands at 6.89% for the first six months for bonds purchased from November 1, 2022 through April 30, 2023. The new rate, though lower, is still attractive and doesn’t affect the general points made in the article below. As we review I Bonds going forward, we will provide an additional update if our opinion changes.
With a current yield of 9.62%,¹ no credit risk in that they are U.S. Government bonds, and no interest rate risk since their principal value cannot decline, Series I Savings Bonds are an attractive option for most investors and savers. The only “downside” is that they are limited to a maximum investment per person of $10,000 per calendar year for electronic purchases, with an additional $5,000 available to purchase paper bonds with your tax refund – if you have one.
Series I savings bonds (“I” stands for “inflation”) also referred to as “I bonds” are issued by the U.S. Government and their interest rate is linked to current inflation rates. Their yield is comprised of a fixed rate, which for these issues is zero, and a semiannual inflation rate, which is 4.81% (9.62% annualized) on bonds purchased between May and October 2022. Six months after purchase, the I bond’s yield will be reset based on the latest inflation rate (from readings done on November 1 and May 1), as measured by the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U). So, if inflation eases over time the yield will reset lower.
A few noteworthy facts are that I bonds pay interest for 30 years, and you can cash them in at any time after holding for one year. But if the bond is redeemed during the first five years after purchase, the seller foregoes the last three months of interest. At six-month intervals interest is added back to the bond’s principal value. Another attractive feature is that interest from I bonds is not subject to state and local taxes, and although they are taxable at the Federal level, that tax can be deferred until the year the bond is sold (or matures) or paid annually (as might make sense if a child is the owner). Eligible education expenses can also be used to offset the taxable interest.
Series I bonds are available through the government’s TreasuryDirect website, where you can buy and redeem securities directly from the U.S. Treasury in paperless electronic form with the annual cap of $10,000. You can purchase an additional $5,000 of paper bonds by using IRS form 8888 (complete Part 2) to direct the IRS to use all or part of your tax refund to purchase paper I bonds. Although your Litman Gregory advisor is not be able add these I bonds to your investment portfolio (you must purchase them on your own) we are happy to guide you through the process. With a 9.62% current yield, this “free lunch” is worth consideration, even if the portions are small. Here is a Q&A from the TreasuryDirect website that walks through the basics, including how to purchase.
Please feel free to reach out to your advisor if you have any questions.
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