By: Edward J. Leach, CFP®
In early April, the Wall Street Journal published an article titled "The Safe Investment That Will Soon Yield Almost 10%." Surprisingly, the investment they were talking about was U.S. Treasury Series I Bonds. I was born in 1987, and I remember being gifted paper Series E, EE, and I Bonds for birthdays and other milestones. They were popular in the 80s and 90s but not a very exciting gift for a child, although I did appreciate them when I cashed them in many years later.
Treasury-issued savings bonds usually only come up in conversations with clients when they stumble upon an envelope full of them in a safety deposit box or firebox.
In 2022, we are talking about Series I Bonds that are projected to have a guaranteed annualized yield of 7.12% from now through October. The product could jump to close to 10% by the end of this year.
What are Series I Bonds?
Series I Bonds are inflation-adjusted U.S. Savings Bonds purchased electronically through TreasuryDirect.gov, the only financial services website that lets you buy and redeem securities directly from the U.S. Department of the Treasury in paperless electronic form.
The maximum amount an individual can purchase is $10,000 per year. Therefore, the annual maximum purchase amount is $20,000 per year for a married couple.
Series I Bonds earn interest for 30 years unless you cash them in first. You can cash them after one year, but you lose the previous three months of interest if you cash them in before five years. For example, if you cash in an I Bond after 18 months, you get the first 15 months of interest.
The interest earned on I Bonds is taxable in the year you cash them in at ordinary Federal Income tax rates but is State income tax-free. If used for higher education and you meet specific criteria, the interest on the Bonds could end up being Federally tax-free. Learn more about this here.
The interest rate will adjust every 6-months based on the trailing 6-month inflation figure put forth by the U.S. Treasury.
You also can purchase an additional $5,000 per individual per year if you receive a tax refund by completing IRS Form 8888.
What's the Investment Case for I Bonds?
The current interest rate on Series I Bonds is 7.12% through April 30th. So, if you purchase an I Bond before the end of April, you will earn an annualized 7.12% until October.
In May, the U.S. Treasury will announce an adjustment to that interest rate based on trailing 6-months inflation. Let's assume that rate goes to 9.6%, which would be the interest rate you would earn beginning in October of this year for the following six months. As a result, if purchased before the end of April over the next 12 months, your return could average about 8.4%.
What's the Risk with I Bonds?
The risk here is inflation falling dramatically after the initial 12 months you own the I Bonds and your yield on this investment falling. However, even if inflation were to fall to its long-term average of 2.5%, you could still earn more interest on this investment over five years than on your savings account at your bank. And you could always simply cash in the Bonds after 12 months and only give up three months' worth of interest.
In this inflationary environment, Series I Bonds could be an excellent alternative for a portion of your cash at your local bank to hedge the opportunity cost of inflation on your short-term cash savings.
For more information on Series I Bonds and how to purchase them, please go directly to the TreasuryDirect website or simply click here. Please contact your Advisor if you have any questions.
Ed Leach, CFP®, MBA is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their business while creating efficiencies in their business and personal financial plans. He is, also, a member of NAPFA which is dedicated to serving fee only advisors.