By Matthew Gaude & Shawn McGuire
We are in a period of high inflation not seen in the U.S. since the 1980s. (1) With many people worried their savings won’t keep up with inflation, we have started getting many questions about I bonds. So what are I bonds and how can you use them to your advantage?
An I bond is a special type of U.S. Treasury bond that pays interest based in part on inflation. The U.S. Treasury recently confirmed that I bonds will pay an annualized interest rate of 9.62% on any bonds purchased between May and October of 2022. (2) I bonds reset at six-month intervals, so the interest rate is locked in for six months regardless of what happens with inflation in the meantime. An I bond will continue to earn interest for up to 30 years.
Conditions of I Bonds
I bonds are pretty straightforward, but there are a couple of conditions you should be aware of. When you buy an I bond, you cannot cash it for at least one full year, and if you cash it out in less than five years, you will lose the last three months of interest. (3)
An individual can purchase a maximum of $10,000 worth of I bonds per year or $20,000 per couple (although a married couple can purchase $30,000 per year if a trust is established because a trust can own bonds as if it were another individual). If you’re self-employed, your business entity can buy an additional $10,000 worth of I bonds. (4)
I Bond Rates
Rates for new bonds are set twice a year—in November and May—which affects bonds purchased during the following six months. For any bonds you buy, your rates will adjust each year on the first of the calendar month when you bought the bond and then six months later. The I Bond interest rate is based on a calculation tied to the Consumer Price Index. In May, the CPI index rose 8.5%, the highest increase in 40 years according to the Bureau of Labor Statistics.
For example, if you buy a bond during July of 2022, the rate will adjust on January 1, 2023, and again on July 1, 2023, based on the rate at the time. (5)
I Bond interest is paid in a lump sum when the bond is cashed and earns interest on the 1st day of the month in the issue date. For instance, if you purchase a bond on July 20, you would earn interest for the full month of July. The interest, which is compounded twice a year, accrues for up to 30 years or until you cash the bond.
Should I Buy I Bonds?
Generally, I bonds are a good temporary place to put your “safe” money that you aren’t going to need anytime soon. We have sometimes recommended buying I bonds with tax refund money. But keep in mind, I bonds will only be attractive for as long as inflation remains high. If inflation drops low enough, I bonds could end up paying less than two- or three-year Treasury bonds. In 20 of the last 24 years, I bond earnings rates have been at or below 2%. (6)
Even if inflation were to plummet (the worst-case scenario, if you only think about your I bonds in a silo), you’ll still be better off than if you’d left the cash in the bank earning nearly nothing. You don’t lose any of your initial investment, and you still keep all your interest except for the last three months. So it’s mainly a question of whether or not you have enough extra cash as I Bonds are not a replacement for long-term funds and liquidity.
We would like to note that the interest earned on Series I bonds is subject to federal income tax, but not subject to state or local income tax. Additionally, I bonds are taxable to any federal estate, gift, and excise taxes (as well as any state, estate or inheritance taxes).
The Wall Street Journal published an article on February 21, 2021, “The Inflation Mess and a Financial Refuge,” emphasizing that the current administration could raise the annual cap for I Savings Bonds from $10,000 to $100,000. We will monitor the situation and keep you apprised if the administration changes the purchase limits.
How Can I Purchase Series I Savings Bonds?
You can buy Series I bonds directly through the treasury using the Treasury Direct website. You cannot purchase these bonds through any custodian (such as Fidelity, Schwab, Pershing, etc.) and Live Oak Wealth Management cannot manage these monies.
We Are Here to Help
A lot of people are thinking about how to protect their investments against inflation and are worried about how inflation could affect their retirements. The market right now is anomalous in many ways, so it’s understandable to have concerns. We are always happy to make ourselves available as a resource for folks who need to talk things through or get a better understanding of their financial picture. Call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
About Matthew
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
About Shawn
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional. Neither APFS nor its Representatives provide tax, legal or accounting advice. All bonds are subject to interest rate risk and you may lose money. I bonds can’t be purchased and held in a traditional or Roth IRA. The I bonds have to be held in a taxable account. Before investing in bonds, you should carefully consider and understand the risks associated with investing in bonds.
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(1) https://www.weforum.org/agenda/2022/06/rates-inflation-federal-reserve-united-states/
(2) https://www.treasurydirect.gov/news/pressroom/pressroom_comeeandi0522.htm
(3) https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iredeem.htm
(5) https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#change
(6) https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#past