May 24, 2022
FILIGHTER Episode 14 – I-Bonds
SHOW NOTES
Lets learn about I-Bonds from the US Treasury that are
currently yielding 9.62% in May 2022
Treasury
Direct Website
May 2022 I BOND RATE CHART.XLSX (treasurydirect.gov)
*Gotta hold them at least 12 months
*Three month penalty if held less than 5
years
*Rates are set 2 times per year and hold for 6 months
(Base Rate, currently Zero, and Inflation Rate, currently
9.62%)
*Must purchase from TreasuryDirect.gov
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What is a Series I Savings Bond?
A savings bond that earns interest based on combining a
fixed rate and an inflation rate for up to 30 years.
Twice a Year Rates are set and there are TWO Rate Components to
a Series I Savings Bond:
- Fixed Rate
- Inflation Rate
The Composite interest rate combines these two separate
rates:
A fixed rate of return, which remains the same throughout the
life of the I bond.
A variable semiannual inflation rate based on changes in the
Consumer Price Index for all Urban Consumers (CPI-U). The Bureau of
the Fiscal Service announces the rates each May and November. The
semiannual inflation rate announced in May is the change between
the CPI-U figures from the preceding September and March; the
inflation rate announced in November is the change between the
CPI-U figures from the preceding March and September.
Because it combines two rates, the interest rate on an I bond
sometimes is called the composite rate or the overall rate.
0.0% + 3.54% May 2021
0.0% + 7.12% Last November 2021
0.0% + 9.62% May of 2022
While the inflation rate can be negative, the composite rate
floor is set to never be less than zero. The only two periods
since 1998 that negative rates for inflation were used took place
in 2009 and 2015.
Using our 20/20 hindsight vision, Say between May 2000 and
October 2000 you were buying an I-Bond, your two combination rates
would be a FIXED RATE of 3.6% plus an Inflation Rate of 3.89% for a
combined rate of 7.49% at the time. ROLL THE CLOCK FORWARD TO
TODAY, and that base rate bond of 3.6% and the new 9.62% Inflation
Rate would take you to 13.39% composite rate for your bond.
How would you like more than 13% rates on a US Government backed
savings bond?
Just FYI the last time you could have bought a bond with a fixed
rate above zero, was November 2019 through April of 2020.
During that 6-month period, the fixed rate was zero point two
percent. 0.2% or 20 basis points in financial rate lingo. A
basis point is 1/100th of one percent.
May 2022 I BOND RATE CHART.XLSX (treasurydirect.gov)
If you purchase a bond during the 6-month window your bond will
receive the current rate for 6 months then interest at the end of
the period will be compounded to your balance semi-annually and
invested at the then new rate for the next 6 months.
If you bought a bond today, May 24th, 2022, your bond
would reset rates every May 1st and November
1st
If you bought on 4th of July, your rates would reset
each July 1st and January 1st
There are some opportunities to either report income earned
annually, or all at the time the bond is cashed out.
There are some key points to know before buying a Series I
Savings Bond:
1) You must hold it for at least a year.
2) If you cash out in less than 5 years, you forfeit the last 3
months interest.
3) When the bond is 30 years old, or at maturity, the bond no
longer earns interest.
Sounds great right? So want to buy some? Easy does
it wrangler….
How do you buy a Series I Savings Bond, or I Bonds for
short….
- Go to Treasurydirect.gov and research the I-Bond (There are
other types of bonds, notes, and bills but we are going to limit
our scope today to I-Bonds)
- Create an Account
- Your account when set up will be linked to a bank account that
transactions will utilize. When you purchase a bond, the funds will
be drafted from the account, when you redeem or cash out of a bond,
the funds will be deposited into your account.
- Once your account is created, you have several options to
purchase I bonds:
- LIMITS – There is a $10,000 limit per person per calendar
year.
- The only way to buy more than $10,000 is to utilize an IRS
Refund to purchase a paper bond up to an additional $5000. This may
be the ONLY good reason to overpay your federal income taxes. When
you file your tax return include IRS FORM 8888 and purchase as
little as $50 or as much as $5000 in multiples of $50
increments.
- MIMIMUMS, $25 on Electronic and $50 on Paper – remember paper
can only be purchased with a Federal Tax Refund
- Lump Sum Purchase, Log in and decide on an amount and buy it
all at once.
- This is the method I used and frankly it was probably the
simplest, one and done for the year.
- Payroll Savings Plan
- Like direct deposit in your checking or savings account, you
can purchase I-Bonds directly by payroll deposit. There are more
instructions on the Treasury Direct site if you are an individual
or employer and want to better understand the set up. If I
still had W-2 Income, this may be a great way to automate the
purchases. The other nice though on the back side when
selling each of these bonds will mature at a different time and can
be used to meet expenses later, say when funding a child’s
education or your own retirement expenses.
- Schedule Purchases
- Recurring options:
- Weekly,
- Biweekly, every other week
- Monthly,
- Bi-monthly, every other month
- Quarterly,
- Semi-annually, every 6 months
- and Annually
- Schedule your own dates
- Birthday every year
- Monthly except June and November when Property Taxes are due
(in Texas) and funds are needed elsewhere
- Basically, you can automate and utilize the site to buy
whenever you want.
- OWNERSHIP – before you purchase a bond you will need to decide
if the ownership will be either:
- Sole Owner
- Primary Owner
- Beneficiary
- In our case, I set up my I-Bonds as myself as First Named
Registrant and my wife as Second-Named registrant Payable on
Death
- You will need a Tax ID number for each owner listed, in my case
that is my Social Security Number
- Other Options:
- GIFTS – you can set up a gift box and purchase bonds for
someone else. Say your children, grandchildren, or anyone
else. They will need to set up a Treasury Direct Account and
provide the number to you for your transfer of the bonds from your
gift box into their account.
- The rate is set at the time you buy the bond for the gift, so
if you want to lock in the 9.62% current rate, be sure to buy the
gift bond before the end of October 2022.
- At the time the gift bond is transferred it counts against the
recipients limit for the calendar year. It may be a good idea to
let a recipient know you intend to purchase an I-bond and be sure
they have not already used up their max $10,000 for the year.
- Some vloggers on you-tube get creative with the ways this can
be manipulated. For instance, they buy bonds for their spouse as a
gift to lock in rates but don’t transfer it out of their gift box
until the following year. Kind of like the gift box is LIMBO
and those don’t count against the giver or receiver limits until
they are transferred. I AM NOT SUGGESTING anyone game the
system, just that it is best to clearly understand the rules and
complications and when you play with fire you might get burned if
you don’t dot all the “I”s and cross all the “T’s”.
How do you know if these are something that fit into your
portfolio?
- Does your Strategic Asset Allocation include a Fixed Income
Component?
- Most asset allocations include components for EQUITIES, FIXED
INCOME, and CASH
- If a portion of your allocation goal is FIXED INCOME, consider
if I-Bonds make sense as a portion of your target allocation.
- Do your diversification goals within Fixed Income include
Inflation protected components?
- For instance, if you hold the Vanguard BND ETF there is not
specific inflation indexed bonds withing the portfolio, but if you
hold VTIP Vanguard Short-Term Inflation Protected Securities Index
Fund ETF shares, you already have exposure to inflation protected
financial instruments.
- If you routinely Rebalance your portfolio, these bonds may not
be sellable (Less than 12 months, or less than 5 years (3-month
penalty) so consider these as a longer term component of your
allocation and perhaps sell a bond mutual fund or ETF to accomplish
the goals of rebalancing by Asset Allocation.
I have been interested in I-bonds since the coverage started in
May 2021 when the rate was 3.54%. When the rate went to 7.12%
we made our first purchases in November 2021. Then again on
the first of January, we purchased additional bonds. The
November purchases reset to 9.62% this month, May 2022 and the
January purchases will reset in July to 9.62%. Many bloggers
published content as to whether you should buy at the old rate
before the reset to push out the tail on higher rates as inflation
declines. It makes little difference to me, and I like to
employ my Half Right Half Wrong philosophy, if you think it makes a
difference buy half before and half after. You will be
“right” if there is such a thing on half of your purchase and can
you really be “WRONG” for buying at 9.62%? You will get 6
months of each rate once you buy as long as you hold the bonds up
until 30 year maturity.
What are other factors to consider in your purchase
decision?
- You will have to set up ANOTHER account
- You will need to let your financial advisor know you have
holdings in a treasury direct account for purposes of any
allocation or rebalance planning.
- If you are very risk averse, the fact that the US Government
stands behind these bonds will help you rest easy at night.
- When you are in a drawdown stage, these will have to be sold
separately from your other asset or investment accounts.
- Liquidity, if you need your money back over the short term
(less than a year) they are not for you, or at least the portion
you need on the short term. It may make sense to buy and hold for
18 months and then liquidate, you will receive the interest and
some compounding but give up the last 3 months interest.
Look into I-Bonds, they could be a good fit, or not!
Hopefully this is now a topic that is no longer something you
didn’t know you didn’t know. 😊
More Education is good! Mind the Gap! Lambo