Purchase Limitations, Lock-up Period, & Real Returns All Need to be Evaluated
Series I bonds are U.S. savings bonds designed to protect the value of your cash from inflation. And with inflation surging to 40-year highs, investors are especially interested in higher-returning, lower-risk investments.
But before making a decision to rush out and buy I bonds, make sure you understand the pros and cons first. This is critically important given that most will instinctively leap to own a security that pays out an annual rate of over 9% – but like any investment – know what you’re buying before you buy.
Taken directly from the U.S. Treasury Department:
“What’s an I bond?
A Series I savings bond is a security that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.
What’s the interest rate on an I bond you buy today?
The fixed rate is locked-in for 30 years and is currently set at 0.00% for new bonds purchased today. The inlfation rate changes every six months in May and October (currently earning interest at an annual rate of 9.62 percent).
This is an important consideration because although the rate is currently very attractive, it is only maintaining it’s purchasing power due to high inflation. Compared to deposit accounts at the bank this is a good alternative. Keep in mind however that there is an opportunity cost for holding I Bonds for the long-term compared to stock investments that may provide better real (inflation-adjusted) returns over longer periods.
Who may own an I Bond?
Individuals: Yes, if you have a Social Security Number and meet any one of these three conditions:
United States citizen, whether you live in the U.S. or abroad
United States resident
Civilian employee of the United States, no matter where you live
To buy and own an electronic I bond, you must first establish a TreasuryDirect account.
Children Under 18
Yes, if they meet one of the conditions above for individuals.
Information concerning electronic and paper bonds:
Electronic bonds in TreasuryDirect. A child may not open a TreasuryDirect account, buy securities in TreasuryDirect, or conduct other transactions in TreasuryDirect. A parent or other adult custodian may open for the child a TreasuryDirect account that is linked to the adult's TreasuryDirect account. The parent or other adult custodian can buy securities and conduct other transactions for the child, and other adults can buy savings bonds for the child as gifts.
Paper bonds. Adults can buy bonds in the name of a child.
How can I buy I bonds?
Buy them in electronic form at TreasuryDirect.gov
Buy them in paper form using your federal income tax refund
What do I bonds cost?
You pay the face value of the bond. For example, you pay $50 for a $50 bond. (The bond increases in value as it earns interest.)
Electronic I bonds come in any amount to the penny for $25 or more. For example, you could buy a $50.23 bond.
Paper bonds are sold in five denominations; $50, $100, $200, $500, $1,000
How much in I bonds can I buy for myself?
In a calendar year, you can acquire:
up to $10,000 in electronic I bonds in TreasuryDirect
up to $5,000 in paper I bonds using your federal income tax refund
Three Points:
The limits apply separately, meaning you could acquire up to $15,000 in I bonds in a calendar year
Bonds you buy for yourself and bonds you receive as gifts or via transfers count toward the limit. Two exceptions:
If a bond is transferred to you due to the death of the original owner, the amount doesn't count toward your limit
If you own a paper bond issued before 2008, you can convert it to an electronic bond in your account in TreasuryDirect regardless of the amount of the bond. (The annual limit before 2008 was greater than today's limit of $10,000.)
The limits are applied per Social Security Number of the first person named as owner of a bond or, for an entity, per Employer Identification Number
Can I buy I bonds as gifts for others?
Yes.
Electronic bonds: You can buy them as gifts for any TreasuryDirect account holder, including children.
Paper bonds: You can request bonds in the names of others and then, once the bonds are mailed to you, give the bonds as gifts.
How much in I bonds can I buy as gifts?
The purchase amount of a gift bond counts toward the annual limit of the recipient, not the giver. So, in a calendar year, you can buy up to $10,000 in electronic bonds and up to $5,000 in paper bonds for each person you buy for.”
MAKE SURE YOU UNDERSTAND I BONDS
One very important detail to especially keep in mind is that you need to hold your I bond for at least one year. And if you hold it for less than five years, you lose three months worth of earnings when cashing out.
Maybe the tax benefits and the protection against inflation are appealing to you. But like any investment, make sure I bonds fit well within your overall financial plan.
