Are Series I Savings Bonds For You?

Series I Savings Bonds have been making headlines lately for the eye-popping interest rates they are currently paying–9.62% on an annual basis. Are Series I Savings Bonds the safe, high-earning investment that you have been searching for? Or are they just too good to be true? Discover the fine print of what you might have assumed was an otherwise simple investment.    

The first thing to understand is that these bonds are actually paying 4.81% for the 6-month period of May through October of 2022. The 9.62% is a doubling convention done to make the bond’s return comparable to other investments.  These bonds are unlikely that rate for an entire year because their interest rate is adjusted every May and November to reflect the current rate of inflation.   

In fact, the entire interest rate these bonds pay is dependent on the level of inflation, we all know is running at a historically high rate at the moment.  But what will be the rate of inflation when the rate gets reset in November? Well, that is anybody’s guess.

Nonetheless, if you think inflation is going to stick around for awhile and these Series I bonds still sound good, you do have the problem that every person is restricted to buying only $10,000 of the bonds every year.  And that is done through an account at TreasuryDirect.gov.  A second option is to request that up to $5,000 of your tax refund be paid to you in paper Series I savings bonds. 

Those are the only two ways that you can purchase these bonds.  Now note that the restriction is $10,000 per account per year. While you can only have one account at TreasuryDirect.gov, nothing is stopping you from setting up an account for every member of your family and annually purchasing them $10,000 of Series I savings bonds, as each account holder must have a unique social security number.

Also appreciate that Series I Savings bonds are intended to be a savings vehicle and not an investment. The bonds have a holding restriction that prohibits cashing them in for one year.  If you decide to cash them in within the first five years, three months of interest income will be deducted. 

If you wish to transfer your savings bonds it can be done at TreasuryDirect.gov. For the paper bonds you received as your tax refund, you will have to fill out U.S. Treasury paperwork to retitle them. 

Getting down to the nitty gritty of Series I Savings Bonds. They pay interest monthly for 30 years which is credited to your TreasuryDirect.gov account. Also know that, what the government gives, the government takes. Interest on Series I bonds is taxable income on your federal tax return.  But it is not taxable income on your state tax return. 

Also, you do have the option to pay the tax either annually as it is earned, or wait and pay it all at once when you cash in the bonds.

For folks with incomes currently below $150,000, they can get a tax break on the interest if they cash in their Series I Saving Bonds to pay for qualified college education expenses. Those educational expenses do need to be claimed on your tax return in the year that you cash the bonds in. 

So as you can see Series I Savings Bonds really have too many restrictions to play a role in your investment portfolio. They were created to help folks of modest means build up long-term savings that will keep up with inflation. Still, these can be a patriotic way to save some of your extra dough and they make a nice educational gift for a young person whom you would like to teach about the importance of saving.

If you have questions about Series I Savings Bonds, go to the TreasuryDirect.gov website or reach out to a Boulay wealth management advisor.