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.
Treasury Inflation-Protected Securities 
Got my tax refund in ibonds. What is the best way to send them to TD to be added to my account, registered mail? Also do I sign the bonds?
TreasuryDirect has good information on the process it calls SmartExchange: https://www.treasurydirect.gov/indiv/research/indepth/smartexchangeinfo.htm
And then a LOT of FAQs: https://www.treasurydirect.gov/indiv/research/indepth/smartexchangeinfo_conversion_faqs.htm
And here is the required form: https://www.treasurydirect.gov/forms/sav1522.pdf (a notary will have to approve your signature)
And with all that, there is not hint about sending by registered mail. But I would certainly use registered mail for something this important.
You DO NOT sign the bonds, per the instructions.
Hi all – quick question on the bank I have associated with my treasury direct account. I started buying iBonds in 2014, and used a bank account that I planned to hold for the duration. Now I’ve been notified that my bank has been acquired by another, and acct #, routing, etc will all be changing later this year. FYI, I’ve already made my 2022 purchase, so just looking ahead to next year. Just looking for opinions as to whether I’ll have to register as a changed bank, or if I’ll somehow be ‘grandfathered’ in because of the acquisition. Just have heard so many horror stories about getting a signature guarantee:(. Thanks for any opinions/advice.
Here is a video about changing registration: https://www.treasurydirect.gov/indiv/tools/how-to-edit-your-bank-account-in-TreasuryDirect.htm
And here is the form you probably will have to fill out: https://www.treasurydirect.gov/indiv/tools/how-to-edit-your-bank-account-in-TreasuryDirect.htm
And here is advice on getting a signature guarantee: https://thefinancebuff.com/treasurydirect-signature-guarantee-i-bonds.html
Hi,
What happens if buy the I bond after May 1. Then you will get 9.62% for the first 6 months, right? Isnt that better than getting 7.12% for first 6 months? Why are you recommending to buy before May 1?
Is the issue that the interest after 6 months is unknown? That will be an issue if the interest after 6 months falls below 7.12%. Correct?
Thanks
Reddy
Yes, we don’t know what the next variable rate will be, based on inflation from March to September. If you buy $10,000 in I Bonds before May 1, you are guaranteed to get a return of $853 in 12 months. If you buy after May 1, you are guaranteed to get a return of $481 in six months, and then some unknown amount in the next six months. So $481 is your worst-case scenario, while investing before May 1 has a worst-case scenario of $853.
For the May 1 scenario to pay off, the next variable rate would need to be more than 7.12%, obviously, which equates to an inflation rate of about 3.56% from March to September. If it is higher than that number, both the investor who bought before May 1 and the investor who bought after May 1 would benefit, because both would get the new variable rate some time after November 2022. Long-term holders should buy before May 1 and get the immediate 7.12% for six months, then 9.62% for six months, and then all future variable rates.
But, sure, if you are looking to hold the I Bond for only 12 months and then immediately redeem, it could make sense to buy after May 1, because you would be losing three months interest from the unknown second variable rate, which probably will be lower. A buyer before May 1 should hold for 15 months before selling, to get the full benefit of the 9.62% interest for six months.
Thanks for detailed response.
David—
I would like to request advice for those whose assets are held in a revocable trust, which Treasury classifies as an “entity”. In the past my spouse and I have limited our annual purchase of I-bonds to $10,000 with ownership in the name of our trust. So our purchase is only half as much as is allowed for a couple who purchase I-bonds individually.
Is it permissible for both partners to purchase $10,000 individually and then re-title the I-bonds in the name of the trust? Is there any other way to avoid “missing out” on I-bond purchases without accumulating assets that must go through the expensive and time-consuming probate process?
A related question concerns the ownership of paper I-bonds received in exchange for a federal tax refund. Is it possible to have the paper bonds titled in the name of a trust? If not, can they be re-titled in the name of the trust?
Thank you for your very helpful articles.
Jim
I don’t have any experience with trusts and I Bond purchases, but I do believe you can re-register I Bonds into a trust. The paper I Bonds may have to be titled in the taxpayer’s name (or names for a couple) but could be converted to electronic I Bonds and retitled, I believe.
You really need two Trust Docs registered with each SS number to max out(good grief!). You can convert bonds from paper to e or move to any registration you like. Forms online but Its all a manual process with forms,waiting, hoping! Without a beneficiary or alike(trust) heirs will need a probate court order to get the bonds! If i did not have already have a significant position, I would not bother! CDs will soon be paying the same amount!
By far the best information one can find anywhere on the I bonds. Thanks David. BTW, how to tell a good investment book from Wall Street propaganda? The latter will not have even a passing reference to I bonds or TIPS.
Except the limits are too low today for any real position in a portfolio. The quirky website and lack of options for Estate planning make these a pain! Converted bonds (paper to etronic are all but hidden). I did buy some when they first came out in 1998, you would be ahead of the S&P 500 with no heartburn from the market roller coaster. The fixed-rate was around 3.5%, so those bonds give a guaranteed inflation-adjusted return of 3.5% for 30 years with taxes deferred. And you could have bought one with your credit card back then too and gotten the bonus points, limit was 20k per person. Ah, those were the days. Yes, I did buy my limit this year, better than the money market.
Without fighting my way thru Treasury Direct, pretty sure the limit was 30K back then. At 3.5 %, half the ‘real’ long term return of the stock market (7 %) a once in a lifetime, riskless bargain.
Registered mine as POD in anticipation of my demise.
Except if you want a joint account with a beneficiary, in case your married and both die you are sol! Only a trust might save you! My $40k bought then is worth 100k today! Do not forget %3.5 was the base not the total they paid you. My 100k today making the 8% today + 3% base.
Click to access ibondratechart.pdf
Hmm, probably need an attorney to sort out the implications of inheritance and titling. The bonds would still be part of our estate regardless of where held.
I only count ‘real’ returns myself. So the return of the current I bond is zero even before taxation. Depending on one’s relationship to the CPI and our personal rate of inflation.
Probate is the issue with beneficiaries etc. If you get the Estate right, Probate is not an issue. Compared to other financial accounts beneficiary handling, TD just stinks. Agree all financial instruments are just pieces of paper till you convert it to dollars or bitcoin.
Bitcoin? My thinking is when the next book on famous manias comes along bitcoins will be in there along with Tulipmania and the South Sea Bubble.
If you got a few accounts you run money thru, choose wisely which one to link. You can change the account later but not online. You will need a form with a medallion signature mailed in! It looks like you can add a second account/change online but you cannot!
Good advice, thanks.
What will the average interest rate be if I sell after 12 months? And the AVERAGE after 15 months to get the last 3 months @ 9.62%. Confused on the math losing 3 months of interest. Thanks!
If you sell after 12 months, you would end up getting about a 6% return, because you would lose half of the 4.8% interest earned in the second six months. So 3.56% + 2.4% = 5.96% (roughly). If you buy late in April, then your year will be up in May 2023. You can redeem in early July 2023 (officially 15 months) and get a return of about 8.5%. (At this point, we don’t know what the variable rate will be next year.)
(7.12 + 9.62) / 2 = 8.37% for 12 months. But if held for 15 months, 3 months earn 0%, correct? This would bring the 8.37% to 80% of it’s value, right? 8.37 * .8 = 6.7% over the course of the entire 15 months. Am I thinking about that correctly?
Or more accurately, if held for about 14 months 8.37 * 85.7% = 7.17%?
No, the 8.37% (actually a little more because of compounding) would be locked in after 12 months. The 3-month penalty would be applied to the new variable rate, which we don’t yet know. So … the penalty applies to the last three months of interest, not a percentage of the total interest.
So you would get 8.37% average over the entire 15 months? Sorry for belaboring the question.
No. You would get 7.12% (annualized) for the first six months, 9.62% for the next six months, and zero for the last three months. If you redeem then, you would have earned about 8.5% compounded over 15 months.
Thanks!