What are Series I Savings Bonds?
- A savings bond that earns interest based on combining a fixed rate and an inflation rate.
- I Bonds are issued by the U.S. government and they can be purchased at TreasuryDirect.gov
How do I buy series I savings bonds?
- I bonds are purchased through the U.S. treasury website
- Cannot be purchased by a standard brokerage account
How much can I invest in series I savings bonds?
- Limit of $10,000 per person or entity each year.
- Additional $5,000 in I bonds if you use your tax return.
- You can purchase them for your kids.
How is the yield determined?
- Yield is determined every 6 months, compounded semiannually.
- The actual interest rate is determined by a combination of fixed rate and the inflation rate
- The combined rate can never be below 0%
- The fixed rate of return, which remains the same throughout the life of the bond.
- Inflation rate part of the rate changes every six months and is set twice a year (May and November)
- The rate is based on the CPI-U for all items
Interest
- Interest is added to the bond each month, then paid out when the bond reaches 30 years or you cash it out.
- If you cash out before the 5-year holding period, you forfeit the previous 3 months of interest.
Taxes
- Interest from Series I savings bonds are taxed at the federal level.
- They are not taxable at the state and local levels.
- You will receive a new document: 1099-INT (give it to your tax accountant)
- You can elect to report interest each year OR report it once you cash the bond, give up ownership, or the bond matures.
- The interest earned on Series I bonds can be used tax-free for college if the following conditions are met: The funds are used for qualified educational expenses for parent or dependent child.
Why Invest in Series I Savings Bonds?
I bonds are generally seen as mid to long-term investments with a reliable return.
Your money will be tied up in I bonds for at least 1 year, preferably for 5 years.
- You can achieve better yields on your capital
- There is better liquidity and lower risk than other alternatives
How can I put the I bonds into use
- Park excess cash above the emergency fund
- Diversifying fixed income force
- They are not taxable at the state and local levels (Hello California and NY)
Risks and Downsides
- TreasuryDirect website is tough to manage
- Liquidity is a concern – Money is parked for 1 year
- You forfeit 3 months of interest if you redeem before the 5-year mark
- The $10,000 limit creates a ceiling on your return
- To learn more about I bonds and determine if they\’re good for your financial situation, go to treasurydirect.gov and/or work with your financial professional.
