From higher inflation to supply chain issues and labor shortages, there has yet to be a dull moment in the economy here in 2021. Now, higher interest rates on I-bonds can be added to the list. Now through April 2022, individuals can earn 7.12%–the second highest rate ever offered—direct from the US government on Series I savings bonds bought directly through the US Department of Treasury.[i]
Why Such an Eye-Popping Rate? In my opinion, Inflation. But most notably, the rapid surge in inflation from March to September. This is because the interest rate on the Series I bond is set twice a year based on recent changes to the Consumer Price Index (CPI). So, November’s pricing is based on the change shown over that period.
How I-Bonds Work
Inflation bonds were first issued in 1998[ii] and are made up of two parts: (1) a base rate which is fixed for the life of the bond and (2) a rate that varies based on the rate of inflation measured by the Consumer Price Index. The inflation-based rate can reset every six months, in May and November. The Treasury Department applies a formula to combine those two rates into a “composite” rate which determines the return.[iii]
The fixed rate on I-bonds has been 0% for more than a year, which means any returns earned on those bonds has come from their variable inflation rate. Of course, because no one can predict what will happen with inflation in the future, it is quite possible these rates will be adjusted lower after April 2022. But whenever the bonds’ inflation does fall, with a fixed rate of zero, the rate paid on the bonds could be considerably less attractive.
But, even if the composite rate for new bonds does go down to zero, it cannot dip below that point, which means you’ll be free from risk of loss of your initial investment. You can redeem your initial investment amount when you redeem the bond. Of course, you will owe federal income tax when you redeem the bond, but you won’t owe state or local taxes on the interest earned.
Savers who bought I-bonds years ago when the fixed-rate component was higher are reaping even higher rewards. Some may even be earning double-digit composite rates now. Bond holders who purchased from May to October 2000, for instance, will earn 10.85% because the latest variable inflation rate is added to the bonds’ fixed rate of 3.6%.[iv]
New Rates Benefit Investors Looking for Low-Risk Investment Options
I-bonds are one of the few places individuals can find protection from inflation without turning to higher risk investments. The interest rate on these I-bonds is guaranteed for the first six months and after that will rise or fall depending on inflation.[v] Keep in mind, you have to hold onto your investment for at least a year; and if you exit before five years, you’ll lose three months of interest. The maximum investment amount is $15,000 per calendar year, the bonds aren’t tradeable, and purchases are limited to U.S. citizens, residents and employees.[vi]
How to Take Advantage of These Rates Before They Fall
Investors looking for a low-risk investment option, consider purchasing the maximum amount allowable in both the 2021 and 2022 calendar years for both yourself, your spouse, and even as gifts for grandchildren. Since the rates could reset in May, April would be the latest date to purchase in 2022.
So, how do you purchase I-bonds?
There are two ways:
(1) Purchase them directly at TreasuryDirect.gov by establishing an online account (with a minimum deposit of $25). You will link your bank account to make the purchase. You won’t receive a paper bond, but most new savings bonds are electronic and remain in your digital account.
You can buy up to $10,000 in digital I-bonds per person, per year.
(2) The second way is to buy I bonds at tax time with your federal income tax refund. You are eligible to buy up to $5,000 in bonds this way, which is the only way left to get paper savings bonds.
Therefore, a couple filing a joint tax return can buy up to $25,000 a year — $10,000 each, plus an extra $5,000 at tax time. It’s possible to buy more by purchasing I-bonds as gifts. With a three-month interest penalty if sold before maturity in the first five years, it’s an option that balances safety and return as well as liquidity options. Of course, you should always speak with your investment professional before making this type of purchase.
At URS Advisory, we are always on the lookout for the best ongoing investment options for our clients. We offer this as part of our overall comprehensive wealth management service. If you are a retiree or pre-retiree looking for a team of dedicated professionals who will look out for your future financial choices this way, we encourage you to reach out to us. We serve clients locally in the Palm Beach area and on the Treasure Coast of South Florida. Schedule a call with us today to discuss your possibilities.
[i] https://www.treasurydirect.gov/news/pressroom/currentibondratespr.htm 8 November 2021
[ii] https://www.treasurydirect.gov/indiv/research/history/histtime/histtime_sb.htm 8 November 2021
[iii] https://www.nytimes.com/2021/11/03/your-money/series-i-bonds-inflation-rate.html 8 November 2021
[iv] Ibid.
[v] https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm 8 November 2021
[vi] Ibid.