What Are I Bonds & Why Is Everyone Talking About Them?
May 20, 2022 at 6:38 p.m.
By Mike Bergen-
One potential silver lining to the return of inflation is the investment return of I Bonds. I Bonds are bonds issued by the United States Treasury, and the return on the bonds is determined by a combination of a fixed rate and variable rate based on inflation as measured by the Consumer Price Index or CPI. CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of goods and services. (Source: U.S. Bureau of Labor Statistics) I Bonds can only be purchased directly from the Treasury and are available in any amount of $25 or more. They are backed by the full faith and credit of the United States, like other Treasury bonds, and the principal will never fluctuate in value. Individuals are limited to purchasing $10,000 each year. Other entities, like living trusts and businesses may also purchase up to $10,000 per year. In addition, you can purchase I Bonds on behalf of children, up to $5000 per child per year. (Source: Treasury Direct)
Interest on I Bonds is calculated by adding a fixed rate, which is determined when the bond is issued, and a variable rate based on the CPI. The variable rate is set every 6 months, at the end of April and October. The current fixed rate is zero percent, and the variable rate is 9.62%. I Bonds purchased through October 2022, will earn that rate for six months after purchase. Interest is credited every six months and accrues until the bond is cashed up to 30 years. (Source: Treasury Direct)
I Bonds must be purchased and redeemed directly from the government; they are not marketable. You must hold the bonds for at least one year before you can cash them in, but the variable interest rate is only set for 6 months. The variable rate for the second six months could be lower or higher than that it was when you originally bought the bond. If you redeem your bonds prior to holding them for five years, you will incur a penalty of 3 months interest. (Source: Treasury Direct)
I Bonds are subject to federal taxation but are exempt from state and local taxation. Another unique feature of I Bonds is that you have two choices as to how you pay taxes. You may either pay the taxes each year on the interest that is credited for that year, or you can defer the taxes until the bond is cashed in or matures after 30 years. According to the Treasury, most investors choose to defer the taxes until redemption, but some choose to pay as they go. One reason you might choose to pay taxes each year on the earnings instead of deferring the taxes is if you believe you are in a lower tax bracket currently than you might be when you actually redeem the bonds. (Source: Treasury Direct)
Bond owners may be able to exclude I Bond interest from taxation if the bond owner pays qualified higher education expenses at an eligible institution in the year in which the bond is redeemed. I Bond interest is not eligible for exclusion if the bond owner has a modified adjusted gross income above the limit set by the IRS. For 2021, the threshold was $98,200 for single or head of household filers or $154,800 for married couples filing jointly. These limits typically change each year, and there are other requirements to qualify for exclusion, so it might be a good idea to consult with your tax adviser about your particular situation. (Sources: IRS, Treasury Direct)
This year so far has been difficult for stock and bond investors, but I Bonds may make a solid addition to your investment portfolio. Treasurydirect.gov fully explains the how I Bonds work.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Alderfer Bergen & Co. and LPL Financial do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC
One potential silver lining to the return of inflation is the investment return of I Bonds. I Bonds are bonds issued by the United States Treasury, and the return on the bonds is determined by a combination of a fixed rate and variable rate based on inflation as measured by the Consumer Price Index or CPI. CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of goods and services. (Source: U.S. Bureau of Labor Statistics) I Bonds can only be purchased directly from the Treasury and are available in any amount of $25 or more. They are backed by the full faith and credit of the United States, like other Treasury bonds, and the principal will never fluctuate in value. Individuals are limited to purchasing $10,000 each year. Other entities, like living trusts and businesses may also purchase up to $10,000 per year. In addition, you can purchase I Bonds on behalf of children, up to $5000 per child per year. (Source: Treasury Direct)
Interest on I Bonds is calculated by adding a fixed rate, which is determined when the bond is issued, and a variable rate based on the CPI. The variable rate is set every 6 months, at the end of April and October. The current fixed rate is zero percent, and the variable rate is 9.62%. I Bonds purchased through October 2022, will earn that rate for six months after purchase. Interest is credited every six months and accrues until the bond is cashed up to 30 years. (Source: Treasury Direct)
I Bonds must be purchased and redeemed directly from the government; they are not marketable. You must hold the bonds for at least one year before you can cash them in, but the variable interest rate is only set for 6 months. The variable rate for the second six months could be lower or higher than that it was when you originally bought the bond. If you redeem your bonds prior to holding them for five years, you will incur a penalty of 3 months interest. (Source: Treasury Direct)
I Bonds are subject to federal taxation but are exempt from state and local taxation. Another unique feature of I Bonds is that you have two choices as to how you pay taxes. You may either pay the taxes each year on the interest that is credited for that year, or you can defer the taxes until the bond is cashed in or matures after 30 years. According to the Treasury, most investors choose to defer the taxes until redemption, but some choose to pay as they go. One reason you might choose to pay taxes each year on the earnings instead of deferring the taxes is if you believe you are in a lower tax bracket currently than you might be when you actually redeem the bonds. (Source: Treasury Direct)
Bond owners may be able to exclude I Bond interest from taxation if the bond owner pays qualified higher education expenses at an eligible institution in the year in which the bond is redeemed. I Bond interest is not eligible for exclusion if the bond owner has a modified adjusted gross income above the limit set by the IRS. For 2021, the threshold was $98,200 for single or head of household filers or $154,800 for married couples filing jointly. These limits typically change each year, and there are other requirements to qualify for exclusion, so it might be a good idea to consult with your tax adviser about your particular situation. (Sources: IRS, Treasury Direct)
This year so far has been difficult for stock and bond investors, but I Bonds may make a solid addition to your investment portfolio. Treasurydirect.gov fully explains the how I Bonds work.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Alderfer Bergen & Co. and LPL Financial do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC
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