You’re probably hearing a lot about I Bonds right now. These US savings bonds are one of the positives of a high inflationary environment. Here is a quick summary explaining what they are, why you may want to buy them, and some logistical tips on buying and redeeming them if you want to purchase them.
What is an I bond?
I bonds are US savings bonds that earn interest based on combining a fixed rate of interest and an inflation rate of interest.
What interest does an I bond earn?
The fixed rate of interest for an I bond stays the same for the life of the bond, and the inflation rate for the I bond is set twice a year (semi-annually). For bonds issued from May 2022 through October 2022, the fixed rate is 0%, and the inflation rate is 9.62%. Bonds purchased after October 30th will have an annualized inflation rate of 6.5% for the first six months.
The Bureau of the Fiscal Service announces the semi-annual inflation rates each May and November.
What is the term of an I bond?
I bonds are 30-year bonds. I bonds have to be held for at least one year before they can be redeemed. If cashed in after one year and before five years, the prior three months of interest is forfeited. Investors should think of I bonds as a minimum of a one-year investment and preferably at least a five-year investment.
What is the tax impact of an I bond?
Interest on I bonds is taxable when the bond is cashed out for US federal income tax purposes. These bonds are exempt from state and local income tax. If I bonds are cashed in and used for higher education expenses, the earned interest may be exempt from federal taxes as well. Consult with your tax advisor when determining if your I bond income is exempt from federal tax. See the specifics here: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ifaq.htm#tax
How do I buy an I bond?
I bonds need to be purchased directly from www.treasurydirect.gov. Each person can have up to $10,000 per year in their name. These bonds have to stay at Treasury Direct until they are cashed out. They cannot be purchased by or held by another institution.
How much can I buy in I bonds in one year?
There are limitations on how much one person can buy. A taxpayer can only buy $10,000 worth of I bonds each year. I bonds can be bought as a gift. For example, a parent can buy a child up to $10,000 in I bonds in the name of the child. The amount you are buying as a gift for someone else counts towards the recipient I bond limit for the year and not the purchaser’s I bond limit for the year.
For information on how to buy Savings Bond gifts, check out this link:
https://www.treasurydirect.gov/files/savings-bonds/how-to-buy-gifts-in-td.pdf
How do I cash in (redeem) my I Bond?
A series I bond can be cashed in after 12 months of the purchase date. If you have electronic I bonds, you can redeem them using the Treasury Direct application online. If you own paper I bonds, some financial institutions will cash these bonds, or you can redeem them by mail. See more specific information here: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iredeem.htm
The owner will receive the original purchase price plus the interest earnings upon redemption (less three months of interest if redeemed within five years of the original purchase date).
Ask your financial advisor if now is the right time for you to buy I bonds as part of your overall financial strategy.
