Last month the U.S Treasury announced that Series I Bonds will begin paying an annual interest rate of 7.12% for purchases between now and April 2022. This is the second highest initial interest rate ever for I Bonds. The rate is variable and tied to the inflation rate as measured by the Consumer Price Index. Rates reset every six months with the next adjustment in May 2022. If inflation stays at these elevated levels, then the rate I Bonds pay shouldn't change much. However, if the inflation rate slows, then the yield on these Bonds will drop as well. Keep in mind that If you purchase an I Bonds at any point between now and April, you will receive the annualized rate of 7.12% for at least a six month period. Even if the rate went to zero for the next six months (which is unlikely) then you would still net an approximate 3.56% rate of return for the year.
While this certainly is an opportunity worth considering you'll want to keep a few things in mind. First, individuals are limited to a maximum of $10,000 of I Bond purchases per calendar year. A married couple could each purchase $10,000 worth of I Bonds bringing the total household investment to $20,000. However, because the purchase limit is per calendar year, this same married couple could make an additional $20,000 purchase anytime after January 1st, 2022 (and then annually thereafter if they wanted to).
Additionally, investors should consider that I Bonds are intended to be long-term investments. As such, you cannot redeem during the first year you own them and there is a penalty for redeeming before five years. If you redeem your Bonds before holding them for at least five years, then you'll be penalized by losing three months worth of interest. For example: if you purchased $10,000 in Bonds today, held them for one year and three months before redeeming them, then you would not receive any interest for the last three months. The most important point here is that there is no liquidity in the first year owning these Bonds - you need to be certain that you will not need the invested amount before then (i.e. these should not be purchases with emergency funds).
On the plus side, I Bonds are not subject to state or local income taxes. The interest is Federally taxable but you can elect to defer the taxes until you redeem your Bonds. I Bonds are backed by the full faith and credit of the U.S. government.
There are some additional strategies to consider if you would like to purchase I Bonds in amounts above the limits. You can direct your tax refund towards purchasing I Bonds. By doing so you'll be eligible to purchase an additional $5,000 on top of the direct purchase of $10,000. You may also be able to purchase I Bonds in other entities that you control such as trusts, estates, corporations and partnerships because the limits on purchases apply to each unique entity. Lastly, you can purchase I Bonds for family members such as your children.
If you are interested in purchasing I Bonds you can do so directly from the U.S. Treasury. You'll want to go to www.treasurydirect.gov to open an account and link your checking account. I bonds are only sold directly from the Treasury and cannot be sold by third parties such as brokers or financial advisors.
Given the current low interest rate & high inflation environment that we find ourselves in, opportunities such as this one should always be considered.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment, legal or tax advice. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. If you have any questions regarding this blog post, please contact us.