Series I Bonds and a 9.62% Interest Rate

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The first time I wrote about Series I Bonds was in November of 2021. I wrote about using I bonds to park excess emergency fund money to stave off inflationary pressures on your cash. November 2021 was the first time I purchased I Bonds because the interest rate was a historic high 7.12%. Now it may be 9.62% based on the latest readings of the Consumer Price Index for all Urban Consumers (CPI-U). I bought the maximum dollar amount for my SS# in November and a month later we did the same for Mr. Moneyaire. We’re going to try and max it out again for 2022 because of yet another historic interest rate that may be declared.

Since the first time I bought these bonds I’ve learned a few more things since my first article on I Bonds. Below I’m going to go over some of the basics on I Bonds and some interesting learnings.

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First, the basics:

What’s a Series I Bond?

Series I Bonds are savings bonds sold by the United States Treasury Department. These bonds are backed by the United States federal government and are the closest thing you can get to a guaranteed return.

These bonds earn interest based on a fixed rate plus an inflation rate, meaning its a composite rate. The Treasury Department determines the inflation rate based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy. This means these bonds keep up with inflation – your money won’t lose value due to inflation when they are in a Series I Bond.

This is the equation that determines the I Bond’s interest rate:

Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]

Why should I consider buying Series I Bonds?

When it comes to portfolio diversification, we are told that a portion of the portfolio should be in bonds. Bonds are considered safe and steady investments. However, many bonds can lose value as interest rates rise. This is because if a bond has a 3% interest rate and the interest rate on new bonds is 4%, there may not be buyers for the bond yielding 3%. Bond funds are a good way to diversify, however they can have expensive management fees and the value of those shares can go down as interest rates increase. Also, some bonds can have long holding periods and high buy ins.

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No fees, practically no risk and a great way to add bonds to your portfolio

I Bonds don’t have fees and after a 12 month holding period you are guaranteed your entire principal back plus interest (less 3 months interest if the bond is less than 5 years old). I bonds grow tax free and are exempt from state taxes.

There are limitations on much in I Bonds can be purchased because of how favorable these bonds are treated. I Bonds are an excellent hedge against inflation and a very safe way to get invested into bonds.

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Do I have to hold these bonds for 30 years?

You have to keep the Series I Bond for at least a year but you can keep it for 30 years. You receive your interest payments when you cash the bond, its also when you receive your principal back. You’ll pay taxes after you cash your bond, not when you earn interest if you report taxes the default way on them. The default is to defer paying taxes until after you cash the bonds.

If you cash out within 5 years, you’ll lose the last three months of interest payments as a penalty. After 5 years you can cash out without penalty.

What’s the current interest rate and how does it work?

For Series I bonds issued between May 2022 and October 2022, the rate is expected to be 9.62%. For Series I bonds issued between November 2021 and April 2022 the rate is 7.12%. These are historic rates.

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The fixed rate stays the same for the life of the bond. The inflation rate resets every 6 months after you purchase the bond. This means that if you buy an Series I Bond in April 2022 your bond will earn 7.12% for the next 6 months and then it will earn the 9.62% for the next six months. After that it’ll go to the next inflation rate (your fixed rate stayed the same). So there really isn’t a reason to wait to buy these bonds until May. Buy them now and take advantage of two really historically high interest rates. Pretty nifty.

When do I earn interest?

The interest pays out monthly and the bond compounds semiannually. Growth in I Bonds is tax free! You won’t have to pay taxes on the gains until you cash out the bond. Yay!

You earn a month’s worth of interest regardless of when in the month you buy the bond. If you buy the bond on November 30th, you still get the entire month’s interest. But don’t wait until the end of the month to open and fund your Treasury Direct account. Opening an account isn’t always straightforward and funds won’t hit your account on weekends.

Photo by Sharon McCutcheon on Unsplash. I Bonds are an easy and safe way to add bonds to your portfolio.
Interest payments don’t show up in the account right away

I started buying I bonds in November of 2021. An important learning is that the account doesn’t reflect the interest that is paid every month. When I first bought the I bonds I logged in a month after I bought them to see how much interest had accrued. None had. I thought to myself, well, it’s the government, of course there’s a delay. A few weeks later, I logged in, and still nothing. I chalked it up to the government being slow.

I checked back in in January and, still, nothing. What could the delay be? I started googling to find answers and found my answer at the Finance Buff’s blog. The reason interest didn’t seem to be accruing was because of the 3 month claw back rule. If the bond is cashed before it is 5 years old, the last 3 months of interest are clawed back. Because of this rule, the account excludes all interest paid in the prior 3 months. Interest won’t be shown in the account until the fifth month.

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How many I bonds can I purchase?

You can buy a maximum of $10,000 per social security number per calendar year. You can also purchase through a corporation, your trust and your tax refund (up to $5k). If you’re a legal resident of the United States with a social security number, you can also buy these bonds. I bonds can also be purchased for kids.

Don’t feel like you HAVE to buy $10k in bonds at a time. You can buy as little as $25 to start and build up. Remember for each new bond you buy, you’re going to get 6 months of interest on it.

Redeeming I Bonds

My first learning is that you can redeem partial portions of your I Bond after 12 months. Bonds can be redeemed in increments of $25. Remember, though, whatever you redeem before 5 years, you’ll be losing out on the last three months of interest.

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Partial redemptions are part principal and part profit

When you redeem a portion of your bond, you’ll be redeeming part principal and part profit. For example, if after 5 years you choose to redeem $500 from your bond that has grown to $10,500 you’ll be paying taxes on the profit from that portion of the bond, only. So, since $500 is about 4.76% of the bond, the government will identify $476.19 as principal and $23.81 as profit. You’ll pay taxes on the $23.81.

How do I buy Series I Bonds?

You can buy these bonds online securely at Treasury Direct after opening an account. Treasury Direct is an absolutely horrendous website. At first I thought it was a phishing scam website. Its legit though, just made in the 1990s and never updated and without any design sense.

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Opening an account is NOT straightforward. If you have to get Form 5444 certified at a bank with a bank manager certified to make such certifications (ugh bureaucracy) and then snail mailed to the US government for authorization, it could take weeks. This happened when we tried opening an account for Mr. Moneyaire. Grrrr. Its important to get the account opened early in the month even if you don’t fund it. This is because if you try opening the account closer to the end of the month and have to do the Form 5444 dance, you could miss out on an entire month’s interest payment.

Make sure you’ve written down or stored your account number, password and security answers away

The first time you create your Treasury Direct account, make sure to save your account number, password, image description and answers to your security questions somewhere.

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When you log in to your Treasury Direct account later you’ll first be asked for your account number. Then an email with a one time passcode will be generated and sent to the email on file with your account. After you put in the one time passcode you’ll be asked to enter your non-case sensitive password using the keyboard seen on the screen. Make sure to write down or store away your account number and password somewhere on your computer or on paper so you remember these two important pieces of information. If you need help logging in and don’t remember your security answers you’ll have to call the Treasury Department for login assistance. They’re actually quite friendly and helpful, but it’s still annoying to have to do. There isn’t an easy password/account recovery you can do online.

When should I buy I Bonds?
Photo by Eric Rothermel on Unsplash.

You’ll get the full 6 month interest rate of the I bonds you purchase. I recommend buying in April to get the benefit of the 7.12% interest rate and then the 9.62% rate. We are putting an additional $10k towards I Bonds in April of 2022 and then we’ll plan to buy bonds in increments of $1,667 in May through October of 2022. This is because putting $20k towards I Bonds this April would leave us with too little in our emergency fund. By laddering we’ll take advantage of the interest rate but not over extend ourselves.

Since you can earn the full month’s interest, even if you buy towards the end of the month, buy then. However, make sure your account is opened and ready to go to get funded. Keep in mind that you can’t purchase bonds on the weekends, so if the last few days of the month are on a weekend, buy the bond before Thursday of that week. I suggest Thursday just in case.

Good Luck!!

Mrs. Moneyaire

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