With inflation at a 40-year high, investing in Series I Savings Bonds could make sense. I Bonds are backed by the full faith and credit of the U.S. government and receive a new rate every six months. I Bonds sold from May 2022 through October 2022 earn an interest rate of 9.62%. Read on to find out more about how these bonds work and how to invest in them.
How Does the Interest Work?
I Bonds earn interest for 30 years, or until you decide to redeem them (whichever comes first). If you redeem them before five years, you lose interest for the previous three months prior to the redemption. After 5 years, you can cash in the bonds without a penalty.
Interest is earned on the bond every month and is compounded semiannually. The interest and principal are paid to you when you cash in the bond. You cannot redeem these bonds before one year, which is the minimum holding period. The interest rate can never go below zero and the redemption value of your I Bonds can never decline.
Why Purchase I Bonds?
These bonds provide a hedge against inflation – instead of having excess cash sitting in your checking account (returning nearly nothing), a strong return of almost 10% seems like a good alternative. Of course, this assumes that you have other funds earmarked for emergencies and will not likely have to redeem the bonds in the first year. One thing to note is that there is an investment limit per taxpayer of $10,000 per year. However, you can purchase up to an additional $5,000 per person using a federal income tax refund.
Are There Any Tax Advantages?
I Bonds also have tax advantages. Although the interest on I Bonds is subject to federal income tax, it is not subject to state or local income tax. For our clients who live in New York (or in other high tax states), this feature is a valuable, added benefit. I Bonds also qualify for the education tax exclusion which permits qualified taxpayers to exclude the interest from their gross federal income when used for qualified higher education expenses.
How Can I Purchase I Bonds?
You can buy I Bonds directly online through the Treasury using the TreasuryDirect website. With a TreasuryDirect account, you can purchase, manage, and redeem I bonds directly from your web browser. You cannot purchase these bonds in a brokerage account or in an investment advisory account and advisors at NestEgg cannot manage these assets on your behalf.
Does It Make Sense To Purchase Series I Savings Bonds?
Investing $10,000 ($20,000 for a couple) into Series I Savings Bonds is a good hedge against high current rates of inflation. As long as you don’t plan to touch the monies for at least one year, we recommend purchasing these bonds and locking into the current high interest rate (guaranteed for a period of six months).