Money Pilot Financial Advisor Podcast
Money Pilot Financial Advisor Podcast
Episode 74 I Bonds
If you have cash savings that you will not need for at least a year, consider investing in US Government I Series Savings Bonds. Check out the Treasury Direct information page for Series I Savings Bonds: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm#irate The I Bonds you buy between now and April 22, 2022 will earn you at least 3 1/2 percent interest over 1 year. After that you should reevaluate and consider redeeming them if other cash savings rates are better.
The interest that the I Bonds pays has two parts. The first part is based on a bond interest rates when you purchase your bond . This interest is fixed for the life of the bonds which is 30 years, unless you sell it first. This fixed part rate for is now 0%.
Now the second part is a floating interest-rate. So you know that if you invest now, that the first part is gonna be 0%. But the second, floating rate is based on inflation and changes every six months in November and April. We had an inflation spike in 2021 . Because of that recent spike in inflation the floating rate for bonds purchased through April 2022 is 7.12% annualized. What this means is for those first six months you'll earn 3.56% on your bond which is half of the annualized rate. Then the floating rate will change for the second six months. The floating rate could also drop to zero if there is no inflation. But even if that happens you would still have a total of 3.56% return for one year.
You can buy up to $10,000 in electronic I Bonds now for calendar year 2021 and up to another $10,000 for calendar year 2022 after January 1st. The bonds are backed by the federal government and it guarantees you will get you money back, plus the interest. You will pay federal income tax on the interest when you redeem the bond, but they are exempt from state tax. You cannot redeem I Bonds in the first year. And if you redeem within 5 years of purchase, you will forfeit the last 3 months of interest earned. The unusual combination of recent high inflation and low general interest rates make the return on I Bonds you purchase between now and the end of April 2022 a pretty good deal compared to other places you can stash your cash.
If you are interested, you buy electronic I Bonds directly from the US Treasury online for amounts from $25-$10,000. You purchase these online directly from the Treasury at https://www.treasurydirect.gov/global_open.htm Each person can buy up to $10,000 in electronic I bonds each calendar year. To open an account you will need your drivers license, Social Security number, and bank routing and account numbers for the electronic transfer of funds and you can designate one beneficiary for your bond.
You can also buy I Bonds as a gift for someone else including minor children. That person would also have to have a treasury direct account. More information is here: https://www.treasurydirect.gov/indiv/planning/plan_gifts.htm
There are also paper I bonds they can only be purchased with a federal income tax refund. You can use up to $5000 of any refund on your federal taxes to purchase these paper Io bonds. More information at https://www.treasurydirect.gov/indiv/research/faq/faq_irstaxfeature.htm And this $5000 limit is in addition to the $10,000 a year electronic I Bond. You would need to file IRS form 8888 with your tax return to do that.
If you’d like more information on bonds in general, check out Episode 53 Bonds. And for an overview of paces to safely invest cash listen to Episode 39 Stash the Cash. Have a wonderful Christmas and we’ll talk again next week.
Welcome to the Money Pilot Financial Advisor podcast where you team up with Money Pilot founder, former Army helicopter pilot and your host Katie Cannon, you put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and land your financial life Hello, and welcome back to the podcast. Today we're talking about US government Series I(that's India) Savings Bonds. Savings Bonds. Really? Snooze alert. Well, yes, this is no hot stock tip. It's a bond tip. You already know that this podcast isn't about crazy, buy, buy, buy then sell sell sell recommendations. But there is a somewhat of a window of opportunity to earn a little bit higher rate of return on cash for the next year. If you have cash stashed away in checking, savings accounts, CDs, money markets, or God forbid in your mattress, you know that interest rates you're earning have been low for the last 10 years or so often, well under 1% a year. I Bonds are not a get rich quick scheme. But right now, there is an opportunity to make a little extra money on a very safe investment. We'll start with a short bottom line up front, then cover the details and caveats and finish up with a recap. Buying some I Bonds right now may be a good fit for you if you have extra cash that you do not need for at least the next year. So this is not something to do with that three to six months emergency fund. For example, the time to invest in US Government I Bonds is before the end of this year. And again in the first four months of 2022. It may be a good fit for a down payment for a home you'll buy in 2023 or spring 2023 tuition. You retirees who like to keep the next several years of expenses in cash can consider this as well. Why do I keep mentioning one year because you cannot redeem that is cash in I bonds within the first year of purchase. Each person may buy up to$10,000 in electronic I bonds each calendar year. But why bonds and why now? The interest rates that they pay changes every six months, but you will earn at least three and a half percent interest in this next year. And it's guaranteed by the federal government not to lose principal value. So you're guaranteed to get your money back plus the interest. You purchase I bonds online yourself directly from the US Treasury. There's no middleman, no fees and no commissions. I'll put a link for where to open an account and how to buy. So this may sound a little too good to be true. Hopefully you are a bit skeptical and want to know the details, because that's what we're going to cover now. You can check out the Treasury direct information page for a series I bonds to see it from the horse's mouth and in great detail. And that link will go in the show notes as well. I bonds are 30 year federal government bonds that earn interest that is paid and taxed when you redeem the bond so that when you sell it, the interest you earn is exempt from state taxation. So you don't have to pay state income tax but you do pay federal income taxes on the interest. You can redeem a partial bond. So if you buy a large bond now you could sell part of it and that case your interest will be distributed before the principal. The interest that I bonds pay has two parts. The first part is based on bond interest rates when you purchase your bond That part of the interest rate is fixed for the life of the bonds, which is 30 years unless you sell it first. This fixed rate for now is 0%, because interest rates in general have been so low. So obviously, that's not the good news. Many of you know, interest rates have been very low. So this is no big surprise. Now, the second part is a floating interest rate. And you'll get both these parts, you'll get that low 0% fixed part, and then the second floating interest part as well. The second floating rate is based on inflation, and changes every six months in November and May.We had an inflation spike in 2021. As you probably know, from seeing how expensive things have gotten. And because of that recent spike in inflation, the floating rate for I bonds purchased through April 2022 is 7.12%, annualized. What this means is, for those first six months, you'll earn 3.56%, which is half of that annualized rate on your bond, then the floating rate will change for the second six months. And we won't know what that floating rates gonna be, until May 1, the floating rate could drop to zero, if there's no inflation.I t probably won't be 7.12%, it's probably gonna be less than that, and it could be zero. But even if that happens, you would still have a total of 3.56% return for one year. Another thing to know about I bonds is that you cannot redeem them within one year of purchase. And if you redeem the bonds within the first five years, you forfeit that is you lose the last three months of interest. So that kind of sucks. The fixed rate is already zero. Now, let's say the floating rate also drops to zero in that second six months, and then you re redeem the bond at the one year mark, you forfeit that last three months of interest. But in this case, that's zero anyway, still leaving you with a total of 3.56% interest in this one year. If the floating rate for the next six months is anything more than zero, you'll have an even better return even with the three month penalty. Then after one year, you can sell the bond if you want to use the money for something else. Or you can see what the next floating rate is and decide if it's still worth keeping the I bonds. They may still be a good deal if inflation rises, but that fixed portion is locked at zero. So when interest rates in general rise again, the rise on other bonds or newly issued I bonds, may may be more attractive. Alright, if you're interested, you buy electronic I bonds directly from the US Treasury online for amounts from $25 to$10,000. Each person can buy up to $10,000 in electronic I bonds each calendar year. And to open an account, you'll need your driver's license, social security number and bank routing number and account numbers for the electronic transfer of funds. And you will be able to designate one beneficiary for your bond. You can also buy bonds as a gift for someone else, including minor children, that person would also have to have a treasury direct account. For more information on that I'll put a link on buying I bonds as a gift in the show notes too. There are also paper I bonds, they can only be purchased with a federal income tax refund. You can use up to $5,000 of any refund on your federal taxes to purchase these paper eye bonds. And this $5,000 limit is in addition to the $10,000 a year electronic eye bonds for the paper bonds, you would need to file IRS Form 888 with your tax return to do that, and for more information on the paper bonds, I'll put a link to that in the show notes as well. Okay, we've arrived at the recap. If you have cash savings that will you will not need for at least a year. Consider investing in US government I series savings bonds. The eye bonds you buy between now and the end of April 2022 will earn you at least 3 1/2 percent interest over one year. After that, you should reevaluate and consider redeeming them if other cash savings rates are better. You can buy up to $10,000 in I bonds now for calendar year 2021. And up to another 10,000 for calendar year 2022 after January 1. The bonds are backed by the federal government and it guarantees you will get your money back plus interest. You will pay federal income tax on the interest when you redeem the bond. But they're exempt from state income tax. You cannot redeem I bonds for the first year. And if you redeem them within five years of purchase, you'll lose out on the last three months of interest earned. I Bonds are usually a snoozer of an investment. But the unusual combination of recent high inflation and low general interest rates make the return on AI bonds you purchase between now and the end of April 2020 a pretty good deal compared to other places you can stash your cash. If you'd like more information on bonds in general, check out Episode 53 Bonds. And for an overview of places to safely invest cash, listen to Episode 39. Stash the Cash. And have a wonderful Christmas and we'll talk with you again next week.
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