Should You Consider I Bonds for Your Portfolio?
Did you know there is a Treasury bond that is currently paying over 9% on an annualized basis? They are called I bonds, and it may make sense to add them to your investments. Here's an overview:
What is an I bond?
An I bond is a savings bond issued by the U.S. Treasury. The interest rate on I bonds has two components — a base rate (currently 0%) which is fixed for the life of the bond, and a variable inflation rate for six months, currently 4.81%, (9.62% annualized), that is reset every six months. The current return, while attractive, could go lower or higher, depending on future inflation.
How do I buy I bonds?
I bonds are not marketable securities that can be bought or sold through a brokerage account. They can only be bought and redeemed through the Treasury department’s website, treasurydirect.gov. As such, RRCM cannot buy I bonds for our clients. You'll need to open an account on-line and initiate the purchase. But don't worry, it's pretty easy to do!
How much can I buy?
Investors are limited to buying $10,000 in I bonds per person per year (electronically), plus they can use a tax refund to buy an additional $5,000 in paper I bonds.
How long until the bonds mature?
I bonds earn interest for 30 years unless you cash them in first. Investors must hold the bonds for 12 months before redeeming, and if redeemed before 5 years, there is a penalty of 3 months of interest. After five years, you can cash them out whenever or let them mature in 30 years. For example, if you cash an I bond after 24 months, you get 21 months of interest.
When do I get paid?
Interest and principal are paid to you when you cash the bond.
Can I lose money?
The value of an I bond will not decline, and rates cannot go below zero. The bonds are backed by the full faith and credit of the U.S. government.
What about taxes?
I bonds are taxable at the federal level, but not taxable at the state level. I bonds used to pay for higher education may also be exempt from Federal taxes, subject to income limits. You can report the interest every year, or defer reporting the interest, putting it off until you file a federal income tax return for the year in which you cash the bonds.
Can I give an I bond as a gift?
You can purchase an electronic I bond as a gift for someone and hold it in the "Gift Box" in your TreasuryDirect account until you are ready to transfer it to the recipient. When gifting I bonds:
- You must hold them in your TreasuryDirect account for at least five business days before you can deliver them to the gift recipient.
- You must provide the recipient's Social Security Number.
- The gift recipient must open or already have a TreasuryDirect account.
- If the recipient is a minor, a parent must open a TreasuryDirect account and establish a Minor Linked account. You will deliver the gift bond to the Minor Linked account.
David is the Co-Founder and Chief Investment Officer of Rappaport Reiches Capital Management. He acts as personal CFO to entrepreneurs and corporate executives, providing organization and clarity in their finances. Please connect with David below. He loves to talk about investing, financial planning, and Aspiritech, a non-profit hiring individuals on the autism spectrum.
The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.