Updated: Aug 16
As the country recovers from the pandemic, rising prices have become a worry for many people. But inflation has also driven up rates on U.S. Treasury’s Series I savings bonds, creating an opportunity for people seeking a higher yielding but still safer investment. In fact, due to the high inflation rate we’ve seen over the last 12 months, these bonds are currently paying an annualized rate of 7.12%..
What are Series I Bonds?
A Series I bond is an interest-bearing U.S. government savings bond that earns a small fixed interest rate plus a variable rate based on inflation. The fixed rate component is determined by the Secretary of the Treasury and announced every six months in May and in November. This fixed rate is then applied to all Series I bonds issued during the next six months and does not change throughout the life of the bond. The current fixed rate is 0%. That means all of the interest earned from Series I Bonds comes from the variable inflation rate. The inflation rate is determined by changes in the Consumer Price Index (CPI). The change in inflation rate is then applied to the bond every six months. After updating in November for the most recent inflation data, these bonds are currently paying 7.12% (0% fixed rate (+) 7.12% inflation rate). This 7.12% rate will be earned for 6 months, at which time the yield will reset to the latest inflation rate (so the yield could go up or down). As inflation decreases, the yields on these bonds will reset to lower interest rates that match current inflation.
There are three unique provisions though for I Bonds compared to most other bonds:
You can only purchase I Bonds directly from the US Treasury at www.treasurydirect.gov. This means you can not typically buy them in other investment accounts like Fidelity, Schwab or TD Ameritrade. Additionally, any money invested in I Bonds would be separate from and not managed by Straight Path Wealth Management.
There is an annual purchase limitation of $10,000 “per entity” each calendar year. “Per entity” means an individual, trust or separate legal entity. So a married couple could purchase $20,000 per year of these bonds. And even a business or trust could also purchase an additional $10,000 of these bonds each year.
I Bonds are technically 20 year bonds (with an optional 10 year extension). However, there is some flexibility. You must hold the bond for at least 12 months before redeeming it. And, if you redeem it before 5 years, you’ll owe a penalty worth the interest of the previous 3 months. After 5 years you can redeem it for full value.
Along with that, Series I bonds have the benefit of interest that’s exempt from state taxes and can be excluded from federal taxes if used to fund education.
Please reach out if this is something that interests you or if you have any questions. We would be happy to have a conversation to see if it fits your current circumstances and goals. Please contact us here or visit our website for more information.