3.54% with a US Government Guarantee: Are Series I Treasury Bonds the New Trend?

For most investors, Series I bonds from the US Treasury have been one of the best-kept secrets in the financial markets since 1998, when they first became available. Honestly, for the last few years, with the Fed keeping interest rates at historically low levels, it has been hard to get excited about any variety of Treasury issue, especially for investors who need to be sure their assets are growing quickly enough to stay ahead of inflation and provide the needed funds for retirement and other long-term goals.

But lately, with the prospect of higher inflation on the horizon and the Fed making noises about rate increases in 2022, the humble I Series Treasury bond has been trending among some market observers. In addition to the interest rate looking more competitive, the full faith and credit backing of the US government makes these bonds among the safest of the safe. So, here are a few fundamentals you need to know.

How to Purchase I-Bonds

Because these bonds must be purchased directly from the US Treasury and because ownership is not transferable, there is no secondary market. This means, among other things, that you can’t hold I-Bonds in a brokerage account. There are three ways to buy and hold I-Bonds:

  1. Online purchase from US Treasury Direct, held in an online Treasury Direct Account. The account and online system is maintained by the Treasury Department, but it’s basically like opening a checking or savings account. Once your account is approved, you can purchase and hold the bonds in electronic form. One of the major benefits of this method is that the purchase amount is up to you; if you want to buy $87.52 in I-Bonds, you can—you aren’t limited to $25 or $50 increments as with other savings bonds. Each individual or entity is limited to $10,000 in purchases, annually.
  2. Paper certificates can be purchased, but only by using your federal income tax refund. You’ll need to file Form 8888 with your return to inform the IRS how much of your refund should be applied to purchasing I-Bonds. Paper certificates are limited to $5,000 per year, and the certificates are mailed to the address you have on file with the IRS.
  3. Payroll deduction through your employer allows you to purchase I-Bonds. For those whose employers offer this option, this can be an effective way to “pay yourself first.”

Things to Know about Series I Bonds

  • You can gift I-Bonds by providing the recipient’s Social Security Number. The recipient must have a Treasury Direct account. If the recipient is a minor, the parent must have a Treasury Direct account and open a Minor Linked Account.
  • The current rate for bonds issued May–October 2021 is 3.54%.
  • The “I” in the name stands for “inflation”; Series I bonds are indexed to the Consumer Price Index (CPI), and the interest rate on the bond is adjusted for inflation every six months, but it never goes below the rate at which the bond was issued.
  • The minimum holding period for I-Bonds is one year; after that, you can redeem the bond from the Treasury at any time for your face value plus accrued interest (remember: there is no secondary market). However, if you redeem the bond sooner than five years after purchase, you’ll pay a penalty equal to three months’ interest. Otherwise, the bonds mature in 30 years.
  • You can defer taxes on the interest earned until redemption or maturity; I-Bond interest is exempt from state or local income taxes. You may avoid paying taxes on the interest if the proceeds from the bonds are used for certain qualified higher education expenses.
  • Series I bonds may be owned by individuals, trusts, estates, corporations, partnerships, and certain other entities.

Especially with the inflation-indexed feature, US Treasury Series I bonds can be an important part of your holdings. As a fiduciary financial advisor, I specialize in helping my clients take advantage of appropriate opportunities as part of their individual financial and investing strategy. To get a free second opinion on your financial strategy for retirement or any other long-term investment goal, click here.

 

Stay Diversified, Stay YOUR Course! 

 

Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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