Should You Buy Series I Savings Bonds for Inflation Protection?
As we face the highest inflation since the 1980’s, stocks and bonds in correction territory and general uncertainty in the markets, many clients and investors are asking about Series I bonds through the federal government. Here is a simple primer to answer everything you ever wanted to know about Series I bonds.
WHAT ARE I BONDS?
Series I bond are low risk investments purchased through the United States Treasury as a way to protect against inflation. They are becoming more popular this year as an alternative to cash or bonds which are earning practically 0% in the case of cash or negative returns in the case of bonds.
HOW MUCH INTEREST CAN YOU EARN ON AN I BOND? Series I bond declare an annualized interest rate but change their interest rate every 6 months based on inflation. Currently I bond issue May-October 2022 are paying an astounding annual rate of 9.62%. However, if inflation increases or decreases after the first 6 months, the actual rate you earn will change.
CAN I BUY AN UNLIMITED AMOUNT OF THESE BONDS? This sounds like a no-brainer; can I invest $100,000 in I bonds? Unfortunately, the maximum investment is $10,000 per person of electronic bonds and an additional $5,000 with your tax refund if you receive one.
Treasury bonds are taxed at the federal level based on your ordinary income. However, they are exempt from state and local taxes.
HOW AND WHEN IS INTEREST PAID
Unfortunately like a traditional bond or bond fund, you cannot receive the interest payments to help your cash flow. Interest is earned monthly and credited to the value of your bond twice per year although you don’t get access to the interest until you cash-in or redeem your bond.
WHAT IS THE FINE PRINT?
First of all, you must own the bond for 1 year. In addition, if you redeem the bond before 5 years, you must pay a penalty of 3 months interest. There are no penalties for cashing in your bond after 5 years.
ARE THESE RIGHT FOR ME?
For most people who have extra cash in the bank or a maturing CD, there is no financial reason why purchasing I bonds may not be a good investment. However, each individual has to determine if the interest earned on $10,000-$15,000 of bonds is worth the time and effort to open a separate account with the government. 9.62% on $10,000 is $962. However, if inflation decreases over time (it most likely will) and after paying ordinary income taxes, your after-tax rate of return will be substantially lower.
STEP BY STEP INSTRUCTIONS TO PURCHASE
1. You cannot purchase these in a brokerage account. First, go to TreasuryDirect.gov and click "Open an Account." Follow the instructions to complete your registration.
2. After you apply for an account, look out for an email from Treasury Direct that contains your new account number. Once you receive it, navigate back to TreasuryDirect.gov and select the "TreasuryDirect" login link under the "Account Login" label. Log in using your account number.
3. You'll receive a one-time passcode in your email that you need to enter on the Treasury Direct screen in the box labeled "OTP." Click "Submit" to log in to your account.
4. Once logged in, select the "Buy Direct" option in the account banner. Select "Series I" and enter your registration information.
5. Indicate your desired I bond purchase (any dollar amount between $25 to $10,000), your bank account information and the date on which you'd like to purchase the bonds. (Recurring purchases can be scheduled for a specific frequency, such as weekly, or by selecting your own dates.) Click "Submit."
6. You'll have one last chance to review your purchase before submitting it and completing the order. You can track and manage your bonds at any time from your Treasury Direct account.
HOW CAN WE HELP?
Financial planning is not just about managing investment portfolios. More importantly, it is about having someone you trust to guide you when the unexpected occurs and to make sure your family has a trusted resource to rely on. If you have questions about whether this investment makes sense based on your unique circumstances, do not hesitate to call Steve at 443-812-5459.
At Abel Financial Management, we are local, family-oriented, and truly independent financial planners with a mission to help you make smart decisions with your money. If you or someone you know faces decisions like these, we invite you to have a conversation with us.