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Six Things to Know Before Investing in Series I Savings Bonds

Jacob King

Looking for a way to keep your money safe but want to be sure that it outpaces inflation?
Series I bonds may be a possible solution for you.

Since the COVID-19 pandemic began, news outlets have bombarded us with headlines referring to “unprecedented times.” It’s certainly an interesting time to be an investor—market volatility is back in 2022 and inflation recently hit 8.5% (its highest since December 1981). On top of that, savings accounts and other short-term savings vehicles like money market funds and CDs are hardly paying anything.

Amid this perfect storm, one investment has become a hot topic: Series I Savings Bonds (also known as “I bonds”). I bonds are currently paying 7.12% and are expected to increase to 9.62% when the interest rate resets next month (interest rate resets semi-annually in May and November). I bonds can be purchased directly through the U.S. Department of the Treasury. Before getting too excited, there are some limitations to these savings bonds, including a maximum yearly investment. However, the investment deserves consideration from investors.

Here are six things you should know before investing in I bonds:

  1. Safety: I bonds are issued directly by the U.S. Department of the Treasury and backed by the U.S. government. As markets remain volatile, safety remains appealing. Investors can purchase I bonds online directly from the U.S. Department of the Treasury Bureau of the Fiscal Service (URL below).
  2. $10,000 Limit: Up to $10,000 of I bonds can be purchased, per person (or entity), per year. A married couple can each purchase $10,000 per year ($20,000 per year total).
  3. 7.12% Interest: The yield on I bonds has two components—a fixed rate and an inflation rate. For I bonds purchased between November 2021 and April 2022, the fixed rate is 0.00%, and the inflation rate is 7.12%, annualized. Bonds purchased after April 2022 will have a new interest rate set by the U.S. Treasury. The current 7.12% yield is the highest since May 2000 and effective for the first six months of owning the I bond (bonds purchased in March 2022 will earn 7.12% through September 2022).
  4. Minimum Requirement: I bonds must be held for a minimum of one year. Additionally, if the I bonds are sold within five years, you must forfeit the previous three months of interest. There is no penalty if the I bonds are held for at least five years. I bonds mature after 30 years, but do not need to be held to maturity.
  5. Taxation: Interest from I bonds is exempt from state income taxes but is subject to federal income tax. If the I bonds are used to finance education, the interest is exempt from Federal income tax (exclusions apply, see Education Tax Exclusions below). Federal income taxes can be deferred for as long as the bonds are held or until it reaches maturity in 30 years.
  6. Gifting: I bonds can be given as gifts. Since interest is tax-free if used for education expenses, family members and friends may purchase I bonds for a student preparing for college.

Series I Savings Bonds seem like a great investment opportunity. For investors who typically hold cash or CDs, this may make sense. Investors with excess cash and expenses due further than 12 months away may opt for an I bond rather than their savings account or short-term bonds. Other investors may decide “the juice isn’t worth the squeeze” seeing as you’re limited to a relatively modest amount of $10,000 per person, per year. Like any opportunity, it is important to consider it within the context of your overall investment objectives.

To purchase I bonds, go to treasurydirect.gov.

While your Beaird Harris advisor is happy to answer any questions on I bonds related to your long-term investment plan, our Client Services Representatives cannot assist with purchasing I bonds. All I bonds purchases must take place through the link above.

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Education Tax Exclusion
The education tax exclusion permits qualified taxpayers to exclude from gross income all or part of the interest paid upon the redemption of eligible savings bonds, when the bond owner pays qualified higher education expenses at an eligible institution.

Who Can Take the Exclusion
You can take the exclusion if all five of the following apply:

  • You cashed qualified U.S. savings bonds in the same tax year for which you are claiming the exclusion.
  • You paid qualified higher education expenses in that same tax year for yourself, your spouse, or your dependents.
  • Your filing status is any status except married filing separately.
  • Your modified adjusted gross income was less than the cut-off amount set by the Internal Revenue Service. This amount typically changes every year. See IRS Form 8815 for the current amount.
    • Exclusion phases out for 2021 when modified AGI is between $83,200–$98,200 ($124,800–$154,800 MFJ or QW). Modified AGI is AGI (before the savings bond interest exclusion) increased by: (1) foreign earned income and housing exclusion, (2) foreign housing deduction, (3) exclusion for income from certain U.S. possessions and Puerto Rico, (4) exclusion for employer adoption benefits, and the (5) student loan interest deduction.
  • You were 24 or older before your savings bonds were issued.

Savings Bonds That Qualify for the Exclusion
To qualify for the exclusion, the bonds must be Series EE or Series I savings bonds issued after 1989 in your name, or, if you are married, they may be issued in your name and your spouse’s name. Note: A bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or the child.

More Information
For more information on the exclusion, see IRS Form 8815.

Required Disclosures: PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Beaird Harris Wealth Management, LLC -“Beaird Harris”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Beaird Harris.

Please remember that if you are a Beaird Harris client, it remains your responsibility to advise Beaird Harris, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Beaird Harris is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Beaird Harris’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request.

Beaird Harris does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Beaird Harris web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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