What is a “Series I Bond” and should I buy some?
US Government I Bonds
The goal of this post is to explain what a US Government I Bond is, who should consider buying them, what to expect, and what the risks are.
What is a “Series I Bond”?
A “Series I Bond” is a specialized bond issued by the United States government. The interest rate paid to bondholders (you!) is based on two parts:
Part 1: The fixed rate. This is currently 0% (as of April 2022). Here are the current rates.
Part 2: The semi-annual inflation rate. This is currently (as of April 2022) 3.56%.
To calculate the composite annual rate, you add the fixed + (semiannual inflation rate x 2). This is currently 7.12%. This interest rate is considered nearly risk-free, though there are liquidity concerns.
Series I bonds pay interest every six months. For example, if you buy a $10,000 bond in early 2022, then 6 months later you should expect to receive $356 in interest.
Finally, note that the interest rates also change every six months.
Who Should Buy These Bonds?
First, there is a limit of $10,000 per person (or legal entity) per year. Yes, parents can buy them for children.
Some people may also qualify for up to $5,000 of additional Series I bonds if you received a tax refund. If you already filed, it’s too late.
Benefits
Since this is a bond sold by the US Government, the risk of loss is extremely low. The interest rate is only guaranteed for 6 months at a time, at which point it will change again. Here is a chart of how interest rates have changes on Series I Bonds recently:
Note a few things. First, the interest rate you see above is roughly equivalent to inflation for that time period. For the last 10 years, you will notice that inflation has been very low! Take each number you see and multiply it by two to get an annual rate.
For reference, anytime you see or hear interest rates discussed, such as mortgage rates, credit card interest, etc, it is always stated as an annual rate. Here is a visual (keep in mind: 3.56% semi-annual interest rate = 7.12% annual interest rate).
When Should You Buy a Series I Bond?
These bonds really make sense when you want a safe place to park some money. However, since the interest rate will change every six months based on inflation, if inflation drops back down, then the interest paid on these bonds will decrease as well. The opposite is also true.
If you buy a bond in April 2022, you will be guaranteed the current rate for the next 6 months, plus the newly-announced rates of approximately 9.62% as of May 2022.
Even if you do buy them in May-October 2022, you still have 6 months of a known high yield, so still potentially a good deal if you are OK with the 12 month liquidity lock-up and the unknown yield beyond the first 6 months.
What’s the catch?
You cannot liquidate your bonds for at least 12 months. If you sell them in less than 5 years, you will forfeit the last 3 months of interest (probably not a bad deal even if you do!).
What else do I need to know?
If your income is under the IRS limits, you may be able to use the interest tax-free to pay for higher education expenses. This would make I Bonds a great choice for parents that have a child in late elementary or middle school. The IRS limits change each year, but have been around $150K for a married couple in recent years.
How do I buy one?
First, if you are planning to buy a Series I Bond, try to do so by April 28, 2022 because we know the full approximate interest rate for the next 12 months. Bonds purchased after April 28 will just only have 6 months of known yield.
Here are the links to open and account and FAQs. You may be able to buy bonds for each individual in your family, plus any entities you solely own with their own tax ID numbers. See the Entity information below for details.
Series I Bonds General Information
Buying I Bonds for an Entity (LLC, etc)
Sources:
Kitces.com (Financial planning “nerd” blog)
TreasuryDirect.Gov (US Government website)
Disclosures: Past performance is no guarantee of future results. Fiduciary Financial Planning Group LLC DBA Real Estate Wealth Planning is an Investment Adviser registered with the State of Texas. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned.
