Image of US Savings Bonds

I Bonds for Lazy Money

The current rate of a new I Bond purchase as of May 2022, is a whopping 9.62%!

Federal Series I Savings Bonds

The Federal Series I Savings Bond, known as an I Bond, is issued by the Treasury Department.  

How secure are they? 

I Bonds are backed by the full faith and credit of the U.S. Government. They provide added protection with inflation adjustments occurring twice a year on the first business day of May and November.   

The Treasury assigns both a fix and an inflation rate. The fixed rate is retained for the lifetime of the bond. It is the inflationary rate that is adjusted twice a year. When the fixed and inflation rate is combined, they are called the composite rate, which is currently 9.62%. This composite rate is good through the end of October 2022 (Series I Savings Bonds Rates & Terms: Calculating Interest Rates). 

Taxation of I Bonds

The interest investors earn on their I Bonds is subject to federal tax, but is state tax-free. Federal tax is deferred until you cash in the bond. If I Bonds are redeemed and used for educational purposes, additional tax benefits may apply.

The Max Annual Investment Amount 

The maximum purchase amount is $10,000 per person per calendar year. Purchasing I Bonds is done directly through the US Treasury and they can not be held within your IRA or 401(k) account.

Is an I Bond is an Appropriate Investment Strategy?

Do you have Lazy Money? Lazy money is excess cash that has no potential for keeping up with inflation. It is not part of your liquid emergency fund. Lazy money is often held in a checking or saving account that only earns a small return on your investment. Take note that I stated, “excess cash“. Maintaining a liquid emergency fund is a significant consideration within a solid financial plan. However, having too much cash can be detrimental.  

Maintaining an Emergency Fund

Most financial advisors recommend keeping between three and six months of expenses in a liquid emergency fund.  

Consider this hypothetical scenario: Miss Hypothetical is single with $4000 in monthly expenses. She understands that ideally she should maintain a minimum of $4000 x 3months = $12,000 up to $4000 x 6 months = $24,000 in her emergency fund. Miss Hypothetical is a good saver with $15,000 in her emergency fund. Recently, for her birthday, her grandparents gave her a check for $30,000. Now she has $45,000 in her savings account.  

In our example about Miss Hypothetical, should she allow her money to remain as lazy money in savings? Possibly not. Miss Hypothetical has a secure job and feels $45,000 far exceeds her emergency fund needs. Miss Hypothetical is now considering an investment strategy that can put this lazy money to work for her long-term benefit.  

The current rate of a new I Bond purchase as of May 2022, is a whopping 9.62%, but that has not always been the case.


Source: U.S. TreasuryDirect

I Bond rate change table from May  2018 through May 2022
I Bond rate change table from May 2018 through May 2022

Recently, droves of investors have sought the upside potential of I Bonds. The current rate of a new I Bond purchase as of May 2022, is a whopping 9.62%! The previous rate from November 2021 through April 2022 was 7.12%. Before last November’s big rate increase, I Bonds have not always provided significant investment advantages. In May of 2011 the rate did climb to 4.60% and in November 2008, it reached 5.64%. However, there have been multiple years when the rate was as low as zero to 2%.  

Additional I Bond Considerations 

Let’s again consider Miss Hypothetical from the story above. She could buy an I Bond In May 2022, for $10,000. If the November composite rate is still high, she can purchase a second I Bond for $10,000 at the beginning of 2023. However, if the inflation adjustment rate goes down significantly in November, Miss Hypothetical may not choose to purchase another $10,000 I Bond. 

Therefore, instead of an additional purchase, she may be considering cashing out her I Bond to invest elsewhere. When removing I Bond funds, there is no interest penalty if the I Bond is held for five years. However, the purchase of I Bonds requires a minimum one-year commitment. “You can cash them after one year. But if you cash them before five years, you lose the previous three months of interest” (Series I Savings Bonds).

To learn more or to purchase an I Bond, visit TreasuryDirect.gov

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References

Series I Savings Bonds Rates & Terms: Calculating Interest Rates. Individual – Series I Savings Bonds Rates & Terms: Calculating Interest Rates. (n.d.). Retrieved December 8, 2021, from https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm.  

Series I Savings Bonds. Individual – Series I Savings Bonds. (n.d.). Retrieved December 11, 2021, from https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm.