Why Investors Should be Buying I Bonds
Every so often, the prices of goods and services rise at a rapid pace. With inflation rising, the current environment is a perfect example. One way that investors can try to protect themselves is through the purchase of I bonds, issued through the U.S. Treasury.
How do I bonds earn interest?
Interest on an I bond is a combination of two rates:
- A fixed rate of return which remains the same throughout the life of the I bond, and
- A variable inflation rate which we calculate twice a year, based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy (CPI-U for March compared with the CPI-U for September of the same year, and then CPI-U for September compared with the CPI-U for March of the following year).
Interest is earned on the bond every month. The interest is compounded semiannually. Twice a year, the interest the bond earned in the previous six months is added to the bond's principal value; then, interest for the next six months is calculated using this adjusted principal.
The interest and principal are paid to you when you cash the bond.
For bonds issued from May 2022 through October 2022, the combined rate is 9.62%.
How can you use I bonds?
Investors can use I bonds to try and combat the effects of inflation on savings accounts or use as an additional source of retirement income. Investors may also want to gift an I bond or to use it as a way to help pay for the education of a loved one.
See the below table for further information on I bonds (source: Treasury Direct)
| Is it taxable? | Federal income tax: Yes |
| Paper or electronic? | Both. (You can buy a paper I bond only when filing a federal income tax return.) |
| Minimum purchase | Electronic: $25 |
| Maximum purchase | Electronic: $10,000, total, each calendar year |
| Available bonds | Electronic: Any amount, to the penny, from $25 to $10,000. |
| How long must I keep an I bond? | I bonds earn interest for 30 years unless you cash them first. You can cash them after one year. But if you cash them before five years, you lose the previous three months of interest. (For example, if you cash an I bond after 18 months, you get the first 15 months of interest.) |
| How do I buy an I bond? | Electronic: Online in TreasuryDirect (including through payroll direct deposit). Must be purchased via www.treasurydirect.gov |
Use of I bond as gift
The annual limit for I bonds per individual is $10,000.00 ($20,000.00 for a married couple). Although the $10,000 limit applies to each recipient, you may gift to as many recipients as you would like, keeping in mind that you may not purchase this gift for a trust or corporation. When purchasing as a gift, you will need the recipient’s personal info and social security number. Gifts do not have to be delivered immediately after purchase and can be held until a further date.
Purchase of I Bonds
Series I Bonds must be purchased directly from the US Treasury via www.treasurydirect.gov and not through your financial advisor.
Adding I bonds to your portfolio
If you are interested in adding I bonds to the mix as part of your investment strategy, the financial advisors at Chatterton and Associates are happy to help. I bonds are a great option for a diversified portfolio whether you want to use them as a gift or as a possible defense against rising inflation. Contact us today to see if I bonds are right for your financial needs.
Sincerely,
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.
