May 2, 2022 update: Treasury holds I Bond’s fixed rate at 0.0%; composite rate soars to 9.62%.
By David Enna, Tipswatch.com
Over the last year, U.S. Series I Savings Bonds have transformed from a little-noticed, quaint mom-and-pop investment to one of the hottest financial topics in the nation. Why? Because I Bonds are now providing handsome returns in a time of near-zero interest rates.
Just one key point to remember: Unlike other financial rages, I Bonds are very safe and very conservative. There is practically zero risk. No one is going to profit from selling you I Bonds. This is not a scam. I Bonds are real, backed by the U.S. government, and if you act within the next 17 days, you can lock in a one-year return of about 8.5%.
If you invest $10,000 before May 1:
- You will earn 7.12% annualized in the first six months, so your balance would be $10,356 by the end of October 2022.
- Then you will earn 9.62% annualized over the next six months, so your $10,356 would grow to $10,853 at the beginning of April 2023.
- That is a return of 8.53% in less than 12 months.
- That’s why you should buy I Bonds before April 30. To do that, you need to start the process right now, or at least very soon.
I know many of my readers already know a lot about I Bonds, and most have probably already purchased up to the $10,000 per person per calendar year limit for 2022. But this article is for those first-time investors who want to jump into I Bonds but are unsure about what they are and how to make a purchase.
What is an I Bond?
An I Bond is a U.S. government security that earns interest based on combining a fixed rate and an inflation rate.
- The fixed rate will never change. Purchases through April 30, 2022, will have a fixed rate of 0.0%. That could change on May 1, when the Treasury resets the rate. But it’s highly likely the Treasury will leave the fixed rate at 0.0%, at least through November 1.
- The inflation-adjusted rate (often called the variable rate) changes each six months to reflect the running rate of inflation. That rate is currently set at 7.12% annualized. It will adjust again on May 1, 2022, for all I Bonds, no matter when they were purchased. The new variable rate will be 9.62% annualized, based on U.S. inflation from September 2021 to March 2022.
- The combination of these two creates the I Bond’s composite rate, which is currently 7.12% and will most likely be 9.62% for purchases from May to October 2022. The composite rate updates every six months based on the permanent fixed rate plus the then-current variable rate.
When you purchase an I Bond, you get the current composite/variable rate for a full six months, and then you will transition to the next variable rate for a full six months. We are now in an unusual two-week period when you know both the current variable rate (7.12%) and the next one (9.62%), so you know exactly what your return will be over the next 12 months (8.53%).
One key “negative” of I Bonds is that the Treasury limits purchases to $10,000 per person per calendar year. For this reason, I advise people interested in inflation protection to invest in I Bonds up to the limit each year, and continue holding until they really need the money.
Also, I Bonds cannot be redeemed until you own them 12 months. If you redeem them after 1 year but before 5 years, you will lose the last three months of interest. After five years, you can redeem any amount at any time with no penalty.
For a much more detailed discussion of these savings bonds, read my Q&A on I Bonds.
For reasons to use I Bonds as part of your emergency fund, read the I Bond Manifesto.
Important first step: Open an account at TreasuryDirect
I Bonds can be purchased in two ways: 1) in electronic form through TreasuryDirect or 2) as a paper savings bond issued in lieu of a federal tax refund (with a limit of $5,000 per tax return).
Opening an account at TreasuryDirect can be a cumbersome process (not always, but it happens) and for that reason I advise anyone interested in making a first purchase of I Bonds to begin immediately to set up an account — or for a couple, two separate accounts. A couple can purchase $20,000 in electronic I Bonds each year, but they must have separate accounts at TreasuryDirect.
Back in May 2021 I wrote a step-by-step guide on opening a TreasuryDirect account. Refer to that link for the full article, but I will summarize some of it now:
What do you need to open an account?
TreasuryDirect says you need these these things to open an individual account:
- A taxpayer identification number … in other words, a Social Security Number.
- A United States address of record. Do you need to be a U.S. citizen? No. Do you need to be living in the U.S.? No. But you need a U.S. address to register the account.
- Be at least 18 years old. A child cannot open a TreasuryDirect account. But a parent or other adult guardian can open an account for a child and link it to the adult’s account.
- A checking or savings account … this can be at a physical or online bank, or at brokerage, such as Fidelity or Vanguard. You will need to know your account and routing numbers.
- An email address.
- A web browser that supports 128-bit encryption. TreasuryDirect states that its site is “optimized for Internet Explorer,” which is classic government dumbness. IE has been replaced by Microsoft Edge and today has a market share of less than 1%. TreasuryDirect even provides “helpful” links to Windows XP service packs that have long-ago been discontinued. TreasuryDirect works fine with Firefox and Chrome browsers. I have tested it with Edge and Safari, too, and it seems to work fine.
Registering your purchases
How you register a savings bond determines who owns the bond and who can cash it. The registration also determines what happens with the bond if the owner dies.
- One owner. Only one person is named as owner. Only that person can make transactions. If he or she dies, the bond becomes part of the estate.
- Owner and beneficiary. Only the owner can make transactions. If he or she dies, the beneficiary becomes the only owner. The beneficiary can’t be an entity. The registration says “PAYABLE ON DEATH,” or “POD.” Example of registration: JOHN DOE POD TO JANE DOE
- Two owners. For electronic bonds (the only option when buying through TreasuryDirect), the first-named owner is the primary owner; the second is secondary. The registration uses “WITH.” An example of this registration is JOHN DOE SSN 987-65-4321 WITH JANE DOE SSN 123-45-6789. If one owner dies, the other becomes sole owner. If one owner is a person, the other can’t be an entity like a trust.
These ownership rules throw a lot of investors for a loop, because they expect to see “Joint Ownership With Right of Survivorship” as an option. How is “with” ownership different from “joint ownership”? I don’t know, but for a married couple, I’d recommend using this “with” ownership, which should avoid issues after the primary owner’s death.
For a more complete guide and step-by-step instructions, please read the full article: “Ready to open a TreasuryDirect account? Here are some tips.“
What are the roadblocks?
The key concern I got in reader feedback from the May 2021 article was that TreasuryDirect did not immediately accept the new investor’s bank or brokerage account, and was requiring a signature guarantee to complete the process. This doesn’t always happen, but when it does, it can cause of delay of several days. That’s why I think it is important to begin the process right away if you want to complete the purchase by April 30.
Harry Sit at FinanceBuff.com wrote an informative article explaining this signature guarantee issue, and so I am referring to him for more information: “Where to Get a Signature Guarantee for I Bonds at TreasuryDirect“.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.