If you are interested participating in the highest yield in history of government issued I bonds, now is the time to buy. With inflation jumping in recent months the anticipated yield will be 9.62%, certainly better than any other guaranteed investment I can think of in the current environment. In this article I will explain how these bonds work and provide details you will need to consider before making a purchase.

Series I bonds are currently paying 7.12%, up from roughly 3% one year ago. When the new rate is announced in May, the yield is expected to adjust to just over 9%. If you purchase your bond by the end of April at 7.12%, you will lock in that rate for six months. On November 1st, the likely 9.62% would then take effect for the next six months, locking in an annualized 8.54% for the next 12 months! The interest for Series I bonds is significantly higher than the interest rate for savings accounts and clearly higher than that for online bank savings accounts. The yield on I bonds is also superior to those of TIPS or other inflation adjusted securities. Series I bonds pay a fixed rate for the life of the bond plus adds an inflation-based rate premium. Consumer Price Index measures inflation and is the component used to determine the inflation-based rate. The inflation-adjusted variable rate is double the semiannual inflation rate. The fixed rate for the Series I bonds resets twice a year, May 1st and November 1st.

At maturity, investors receive the initial investment, or bond’s face value, and the overall rate cannot fall below zero. Therefore, unlike TIPS, Series I bonds will never fall below zero even if we experience deflation. Series I bonds protect against inflation, and they can certainly make sense in an elevated inflationary environment like we have today.

Series I bonds have their limits and drawbacks however. The limit per person, per year to purchase I bonds is $10,000, and these bonds are digital only. To purchase, one has to go to TreasuryDirect.gov and set up an electronic TreasuryDirect account. Because no commissions are involved, there are no brokers to go through. One could go over this $10,000 limit and buy an additional $5,000 of I bonds if using an income tax refund, or receiving Series I bonds as payment instead of a tax refund. These additional bonds are paper only. For example, a married couple can purchase a total of $30,000 in Series I bonds, with $20,000 digital and $10,000 paper. Additionally, Series I Bonds are not liquid. The holding period for any Series I bonds is a minimum of 12 months, and you cannot redeem it any earlier. The last three months of Series I bond interest is forfeited if you cash out before five full years. To compare, TIPS have a much higher purchase limit and are available on the secondary market. With respect to taxation, the federal government taxes Series I bonds at the federal level but not at the state or local level. Investors owe taxes at the time of Series I bond redemption, unlike TIPS for which investors owe taxes as interest accrues. Series I bond investors have the option to pay taxes as they accrue. The taxes are potentially fully avoidable if the investor is in a lower tax bracket and is using the proceeds to pay college expenses (tuition and fees only). One can earn interest on I bonds for up to 30 years. One can redeem the Series I bond at 30 years, and all the tax up to that moment of redemption are tax deferred. Series I Bonds pay interest monthly, and this interest compounds every six months.

Keep in mind that with a zero base rate, I bonds would earn less if inflation falls, rates reset, and the Series I bond’s variable rate falls. Also remember if you think you will need the funds in the next 12 months, it’s probably not a good idea to purchase I bonds. As always consult a tax or investment professional before making these important decisions.

 

Click here to read more of my RetireMint articles. Follow me on Twitter.

 

Important Consumer Disclosures

Mainstay Capital Management, LLC is an investment advisor registered with the Securities and Exchange Commission. Due to various state regulations and filing requirements, Mainstay and its representatives may only provide investment advisory services in those states in which it is first appropriately registered or otherwise exempt or excluded from registration requirements. The purpose of this website is to provide the public with general information about the services offered by our investment management firm. Mainstay does not render personalized investment advice or services or effect, or attempt to effect any securities transactions, on this website. Our firm continuously monitors its filing requirements in all states, and will provide individualized advisory services only in accordance with various state regulations. Mainstay does not make any representations or warranties as to the accuracy, completeness, or relevance of any information prepared by any unaffiliated third party provider, whether linked to Mainstay's website or incorporated herein. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

 

Disclosure Information - Rankings and Awards

Barron's Magazine - Top 100 Independent Financial Advisors

According to Barron’s: The rankings are based on data provided by individual advisors and their firms. Advisor data is confirmed via regulatory databases, cross‐checks with securities firms and conversations with individual advisors. The formula Barron’s uses to rank advisors is proprietary. It has three major components: assets managed, revenue produced and quality of practice. Investment returns are not a component of the rankings because an advisor’s returns are dictated largely by the risk tolerance of clients. The quality of practice component includes an evaluation of each advisor’s regulatory record. The data is based on one fiscal year (7/1/22 - 6/30/23) and appeared in Barron’s on 9/18/23.


Schwab IMPACT Awards
®

The Charles Schwab & Co., Inc.’s IMPACT Awards® program recognizes excellence in the business of independent financial advice. Nominees are evaluated and selected by a panel of prominent leaders from both the business world and the financial services industry. Mainstay Capital Management does use Charles Schwab to custody certain client assets, however there was no direct compensation provided to be nominated for this award. Mainstay Capital Management received this annual award on November 15, 2017.