Do you have some cash that is currently sitting on the sidelines with no plans to use it within the next 12-months?
There may be a compelling investment option for you: Series I Savings Bonds.
For those that are unfamiliar, a Series I Savings Bond is a type of bond investment that you buy directly from the US Treasury. This is not an investment vehicle that you can purchase within your 401(k), IRA account, or your generic investment account.
You must visit the Treasury’s website and set up an account to ultimately purchase these.
There are some unique characteristics when it comes to I Bonds that you should be aware of prior to purchasing.
These instruments pay investors a combination of a fixed interest payment, set by the Treasury, and an inflation rate, which changes every 6-months based on the Consumer Price Index (CPI).
The Treasury will update the rates offered on these instruments on May 1st and November 1st of each year. As of right now, Series I bonds are paying 9.62% through October. Important to note: this percentage is subject to change. If inflation begins to decrease, which we are seeing some signs of this, the CPI rating could trend lower. If that is the case, then the interest percentage offered on these could be lower come November.
Let’s break down some further advantages and disadvantages:
Default risk is essentially zero: These are backed by the US Government. So, these are viewed as essentially risk-free investments as we expect (for now) that the default risk for US Government investments to be close to zero.
Tax Incentives: The interest you earn on your investment is not subject to state and local income tax. You are subject to federal income tax but you may be able to avoid this as well (see next point). It is worth noting that you can defer the amount of federal income tax you will have to pay until you actually redeem the I bonds. So, if you hold them for 5-years, you don’t necessarily have to report the income in years 1-4, you can simply report the total amount of interest earned when you redeem in year 5.
Use for college expenses: If you were to use the proceeds from your Series I bonds to pay for qualified education expenses, the interest you earned would not be subject to federal income taxes. There are some specific circumstances that need to be met in order to qualify for this but this can be another tool to help fund educational expenses outside of your 529 account.
Lack of liquidity: When it comes to investing in I Bonds, you must hold them for at least 12-months. After that 12-month lock up period, you have the option to cash them out whenever you please. However, if you redeem these within 5-years since purchase, the interest you earned during the 3-months prior to cashing out will be forfeited. For example, if you purchase some I bonds and sell them after 18-months, you will only have earned 15-months of interest.
Limited Investment Amount: As of right now, you are only allowed to purchase $10,000 worth of Series I Bonds electronically. I stress the word electronically because there is one other option you can explore. If you are someone who typically gets a federal tax refund, you have the ability to submit IRS Form 8888 and use that refund to purchase up to $5,000 of ‘paper’ I bonds. So, all in, you have the ability to purchase up to $15,000 per year. Please note that this can only be for you. There are no joint accounts when it comes to these. Also, just as an FYI, the minimum amount you have to invest is $25.
Log-In Issues: With this being run by the Government, it should not be surprising that their website is not user friendly. It’s archaic and customer service can be of no help. There are also stories out there where people have issues getting ‘authenticated’ when opening their accounts. This can result in you needing to provide additional documentation, getting things notarized, or just being in limbo forever and then ultimately not being able to go through with the purchase.
These type of bonds are continuing to gain popularity as the CPI readings have been significantly higher compared to prior years.
Series I Bonds can serve as a great tool to address your cash management situation. If you plan to have some cash that will otherwise be sitting in a checking or savings account for the next 12-months, consider buying some I bonds.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.