Have you heard the news? I Bonds are at an all-time high-interest rate of 9.62%, making them the best inflation cushion for investors like you. If you need a safe investment for your cash when the inflation rate is soaring at a terrific speed, I-Bonds are the best option. This article is a complete guide to Series I Savings Bonds, AKA, I Bonds, and how to invest in these risk-free assets.
What are I Bonds, and How Do They Work?
Inflation-protected Series I Savings Bonds are tax-deferred and risk-free assets the U.S Treasury offers. You can invest in these government-backed securities to protect your money from inflation surges. Typically, I Bonds are tied to the inflation rate, so The Fed adjusts it accordingly to give investors the best returns.
The Series I Savings Bonds are the investors’ new area of interest after the new 9.62% interest rate announced by the Treasury Department.
Issued for the first time in 1998, I Bonds offer a fixed-rate return and an adjustable-rate return based on inflation. The inflation-adjusted variable rate return changes every six months, responding to the Consumer Price Index for all urban consumers.
In simple terms, I Bonds deliver the highest returns on your principal amount as the inflation rises.
Unlike other investment options like savings accounts and CD (Certificate of Deposit), I Bonds are a long-term surefire way to protect your liquid assets from losing value.
So, How do I Bonds Work?
Once you buy an I Bond from the TreasuryDirect site, it earns monthly interest from the issue date to maturity, which is 30 years. Does the 30-year maturity sound like a lifetime? You can cash out your I Bond any time after the first year, and there is a catch—we’ll look into this more later.
Your principal amount compounds semi-annually since I Bonds’ interest rates are revised twice yearly. In other words, the Treasury will add the total accrued interest from the issue date to the bond value to get a new principal amount.
The new principal amount will earn interest at whatever rate available for the current semi-annual.
You can purchase paper or electronic Series I Savings Bonds. The minimum amount you need to buy an electronic I Bond is $25, and you can buy these electronic bonds for any amount to the penny.
On the other hand, with paper I Bonds, the minimum purchase is $50 and are only available in face value of $50, $100, $200, $500, and $1,000.
The maximum amount of I Bonds you can buy each year is $10,000 for electronic bonds and $5,000 for the paper I Bond. You are eligible to purchase electronic and additional paper I Bonds worth $5,000 with your tax refund per year.
Married couples can be eligible to buy a maximum of $20,000 in I Bonds per year.
In a snap, Series I Savings Bonds are the ideal government security for investors looking for a long-term saving option for a large sum of money.
The current enticing I Bond interest rate of 9.62% applies for bonds purchased between May and October 2022.
Should the inflation rate drop, you can expect the I Bonds’ interest rates to decrease.
What is the Difference Between I Bonds and EE Bonds?
Series I and EE Savings Bonds are Treasury Securities with different perks. What sets the two bonds apart is that I Bonds offer a fixed and variable rate return to match inflation while the EE Savings Bonds offer a fixed return rate.
Additionally, the EE Bonds guarantee double value over a saving period of 20 years, while the I Bond doesn’t offer this benefit.
Another difference between I Bonds and Series EE Savings Bonds is that the latter are available electronically only, while you can buy the former in electronic or paper.
Are I Bonds A Good Investment?
The unforgiving, 40-year high inflation rate is giving investors sleepless nights. Locking close to 10% returns on your investment might be the best money move.
Below are the best reasons why Series I Savings Bonds are a good investment.
1. Federally-Backed Savings Bonds
One reason to add I Bonds to your portfolio is that these investments have the U.S government’s full faith. Federally-secured savings bonds are less volatile and risk-free than stocks.
2. High Returns
If you hold your I Bonds to maturity, you can be confident of reaping a predictable high yield on your principal amount. The opportunity to get high returns risk-free is too enticing to ignore.
3. Tax Benefits
Did you know that you won’t have to pay state and local taxes on I Savings Bonds? You will enjoy tax-free interest, which is a great deal if you live in one of the states with the highest income taxes.
Federally, your interest earnings accrue tax-free until maturity, and the yield at maturity is subject to federal taxes unless you use the revenues to fund higher education.
4. Cushion Against Inflation
The main goal of I Bonds is to counteract inflation impacts, and thus the “I” in Series I Savings Bonds stands for inflation. Investing in I Bonds will give you a stronger purchasing power amid the crushing economy.
Are Series I Savings Bonds Taxable? Tax and I Bonds
I Bonds, like other fixed-income investments, enjoy some excellent tax benefits. First, I Bonds are tax-free at the state and local levels, which means you owe federal income tax only on the bond yield.
You owe the federal income taxes if you are the sole owner of the Bond or co-own it with someone else. If you purchase a bond under another person’s name, that individual is responsible for the tax filing on the Bond.
If you buy the I Bond and add another person as the co-owner, you’re still responsible for the tax.
There are two tax reporting options for you when you own I Bonds. You can choose to report taxes on the bond earnings every year or defer it until bond maturity or when you give up the Series I Savings Bond ownership.
The benefit of annually filing your bond taxes is that you can enjoy lower tax rates than might be in the tax maturity year.
TreasuryDirect automatically reports the electronic bond earnings to the IRS once it matures or is reissued—the interest will reflect in the 1099-INT. When you redeem your paper bond at the bank or credit union, they’ll offer you the IRS interest income form within the first two months.
Do you want to use I Bonds to save money for college or university expenses? I Bonds for eligible college expenses are tax-free once they mature and you use them on education within that tax year. This tax benefit applies to spending the I Bond earnings on your education, spouse, child, or other dependents.
Factors to Consider Before Investing in I Savings Bonds
Before you commit your money into I Savings Bonds, the first thing to know is the maturity date.
Dissimilar to other short-term fixed-income investments, I Bonds are long-term. These Bonds have an initial 20-year maturity and an additional 10-year if you need to extend the maturity.
You’ll have to wait for 30 years to access your funds and enjoy the interest.
If you redeem your I Bonds before maturity, you risk forfeiting some of the interest returns.
Technically, you’ll have to hold the bonds for at least 12 months before redeeming them. And the catch here is that you will forfeit the last three months’ earnings once you liquidate the I Bond within the first five years.
You can try short or mid-term fixed-income investments if you prefer a lower bond maturity.
Another crucial factor is the I Bond purchase limits. You can also purchase up to $10,000 in electronic bonds, and if eligible, you can add $5,000 in paper bonds from your tax refund per year. This means that I bonds are excellent options for the average consumer and may not be valuable for the wealthy.
Another consideration is that you can only buy and cash I Bonds on the TreasuryDirect platform, and there are no go-betweens.
Eligibility to Buy I Bonds
Who can buy I Bonds? To purchase and own I Bonds, you must be a U.S citizen, resident, or a civilian employee of the U.S. Individuals, children, estates, trusts, cooperations, and partnerships can be eligible to own I Bonds.
Notably, your child is eligible to own Series I Savings Bonds under a custodian account.
For instance, you can open a TreasuryDirect account for your child and manage all the transactions with electronic I Bonds. You can transfer the account ownership to your child once they hit the age of the majority.
With paper I Bonds, you can buy the asset in your child’s name.
Where and How to Buy I Bonds?
You can buy I Bonds only at the TreasuryDirect, which means you need to open your TreasuryDirect account. It takes less than four minutes to create your account online. And to open a TreasuryDirect account, you’ll need your social security number, address, email address, and checking or savings account.
Once you create your account, you’ll receive a TreasuryDirect email with your new account number. You’ll need this number to log in to TreasuryDirect.
Follow the prompts to log in with a one-time OTP and start the I Bonds ownership process.
Navigate to the BuyDirect, select Series I, and fill in your registration information.
Choose the amounts of electronic I Bonds you would like to buy—between $25 to $10,000— and set the purchase date. You can automize recurring I Bonds purchases and submit them.
Please review the information carefully before finalizing your I Savings Bonds purchase online.
If you need to buy paper Series I Savings Bond, you’ll have to fill and submit IRS Form 8888 when filing your tax returns. Typically, you’re authorizing IRS to buy paper I Bonds with a part or all of your tax returns.
You don’t need the TreasuryDirect account to buy I Bonds, and you can choose between $50, $100, $200, $500, and $1,000 denominations.
For instance, if you need to spend $300, you can buy fewer possible face values in increments.
Make recurring paper I Bonds investments to a maximum of $5,000.
How Do You Calculate the Series I Bonds Interest?
You can keep track of your electronic I Bonds interest earnings online through your account. TreasuryDirect offers an online savings bond calculator to evaluate the current value of your paper I Bonds.
The I Bonds calculator can also help you estimate the interest rate, up-to-date interest earnings, next accrual, and maturity dates.
How to Use Series I Savings Bonds?
You can use I Bonds to achieve various financial goals like earning interest to boost your retirement income and funding higher education.
Additionally, you can buy I Bonds as a gift for someone you love to give on any occasion. Whether it is Christmas, Thanksgiving, or National Brother’s Day, I Bonds can make the perfect gift.
Furthermore, you can use I Bonds to get a hedge against the surging inflation.
I Bonds Explained
I Bonds can be the best-guaranteed strategy to protect your cash from inflation. The current 9.62% return on I Bonds is too juicy to pass, and the best thing is that you can invest starting with $25.
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