U.S. Treasury’s Series I Savings Bonds, or “I-Bonds” are a security that is issued by the US Treasury and can be purchased on their subsidiary site “Treasury Direct”. Since 1998, these securities have been tracking inflation. I-Bonds, together with EE Bonds, can be considered one of the safest investments as they are backed by the US Treasury. They can be purchased in $25 increments up to $10k/person/calendar year.
The Rate of an I-Bond consists of 2 components – a fixed and a semiannual inflation rate. Combined, they make a “Composite Rate” which is the actual rate of interest the I Bond will earn over a six-month period. The Fixed Rate is established at the time you purchase the bond and lasts the full maturity of the Bond (30 years before it stops paying interest). The semiannual inflation rate is the rate that is linked to inflation and changes every 6 months (May and November each year). The current rate is 7.12%, the highest it has been since May 2000! This rate will stay through April 2022. If you purchase any time before then, you are guaranteed 6 months of interest at this rate.
Of course, one should take into consideration the limited liquidity of the bond, the funds are locked in for 12 months from the time of purchase. You can cash the bond at any time but would forfeit the last 3 months of interest. (Example: You buy the bond in April, hold it for a year and if the 3rd rate announced (Months 13-18) is not favorable, we would advise you to hold an additional 3 months (not to give back the 3 months at a more favorable rate) and then cash in the bond). Once the bond has been held for 5 years or more, the bond can be cashed at any time without penalty.
Taxation is an important aspect of all securities, and with I-Bonds, it is one of the benefits. Even though the interest that accrues on the Bond gets reinvested into the Bond lot, it does not create a taxable event. The only taxable event with I-Bonds is cashing them in. When you do cash them in, you only pay Federal Taxes, as State and Local Tax (if applicable) is omitted.
I-Bonds can only be purchased through the platform mentioned above – Treasury Direct. You will need to open an account at https://www.treasurydirect.gov/tdhome.htm. You will be able to link an outside account to fund the purchase during the process of opening. We prefer our clients to link their Fidelity Brokerage Account if possible so that we can confirm the purchase(s) have been completed. This allows us to assist with the purchases as well.
Gifting is also an option for I-Bonds. You can gift in the name of children to save for their college (income limits may apply) You can also gift in the name of grandparents, spouses, or adult children if they do not want to open an account themselves. The limit of $10,000 per person per calendar year still applies.
4-28-22 is the last day you can place a bond purchase order at Treasury Direct and have it guaranteed to come out before the new rate takes effect. In conclusion, we recommend considering I-Bonds either as a 15-month CD or a Long-Term investment (up to 30 years), especially as a part of maintaining a diversified portfolio which is something that we at Lighthouse both preach and practice. Either way, ask a Lighthouse team member during your next meeting if they are right for you.