Sunday Signal June 19, 2022

Page 6

6 · S U N D AYS I G N A L

J U N E 19, 2022

N E W S F E AT U R E

Series I Savings Bonds Are Earning 9.62% Can you lock down some cash for a year?

By Jim Walker Signal Staff Writer

T

he latest investment buzz is that the initial interest rate on new Series I Savings Bonds is 9.62%! You heard right. This exciting interest rate has definitely caught everyone’s attention, and I Bonds can be purchased through October 2022 at the current rate. That rate is applied to the six months after the purchase is made. For example, if you buy an I Bond on July 1, the 9.62% would be applied through Dec. 31. It sounds great, but are Series I Bonds right for you? Jerrod Ferguson is the vice president at Vance Wealth in Santa Clarita, and here he guides us through all the important points. First, an I Bond is a savings bond that earns interest based on combining a fixed rate and an inflation rate. They are non-marketable. They can’t be bought or sold in secondary securities markets. “You should know that only $10,000 in I Bonds can be purchased annually per person — so $20,000 per couple,” Ferguson said. “Series I Bonds are issued by the U.S. government. There is no secondary market, so they must be redeemed directly with the government. They are backed by the full faith and credit of the U.S. government, so are default risk-free. They have a maturity of 30 years, and will stop earning interest beyond this point.” You can use I Bonds to save in a low-risk product that helps protect your savings from inflation. You can also give them as gifts, or use them to pay for education, which might reduce your tax liability. “These are zero-coupon bonds, meaning the interest is not paid out as it accrues,” Ferguson said. “Instead, it gets added to the principal of the bond and is paid out upon redemption, allowing for compounding. So, if clients are looking for interest income, this wouldn’t necessarily satisfy that need, considering the interest adds to the principal and does not get paid out.”

How do I Bonds earn interest?

As you will see below, and I Bond earns interest based on combining a fixed rate and an inflation rate. The fixed rate stays the same for the life of the bond and the inflation rate is set twice a year, based on changes in the nonseasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy. As previously noted, for bonds issued from May 2022 through October 2022, the combined rate is 9.62%. The interest is earned on the bond every month, compounded semiannually. Twice a year, the interest the bond earned in the previous six months is added to the bond’s principal value;

PHOTOS CRED

then, interest for the next six months is calculated using this adjusted principal. The interest and principal are paid to you when you cash the bond. Ferguson noted that what makes Series I Bonds such a great purchase right now is the current inflation rate. The fixed rate in the calculation is 0.0%. The entire 9.62% composite rate comes from inflation. Currently Fixed rate 0.00% Semiannual inflation rate 4.81% Composite rate 0.00 + (2 x 4.81) = 9.62% However, inflation was much lower in, for example, November 2018, and so the composite rate was only 2.82%. In November Of 2018 Fixed rate 0.50% Semiannual inflation rate 1.16% Composite rate 0.50 + (2 x 1.16) = 2.82% That 2.82% rate isn’t bad, but the current 9.62% rate is exceptional. And, Ferguson said, “Compared to cash rates at your local bank, this is a great alternative. We have some clients that sit on elevated cash balances. It could make sense for those individuals to take a portion of their cash earning very little interest and diversify into an I Bond, especially if they do not need the funds within the next 12 months, at the earliest.”

Taxes and Profits

Profits from I Bonds are subject to federal income tax. They are not subject to state or local income taxes. “These are safe assets that help you keep pace with inflation,” Ferguson said. “It sounds obvious but, when inflation is high, they are attractive and when inflation is low, they are far less attractive. “There’s a reason why they’ve been around since the ’90s but you’re just now hearing about them. At a $10K max limit per purchaser, it would be tough to get a large enough percentage of your assets in-

IT TREASURY

DIREC T

vested in these bonds for it to really make a difference. But if a client has up to $10,000 (or $20,000 for a couple) sitting in cash earning 0.05% nominal (-7.00% real), this would be a great alternative.”

Details

The minimum purchase amount for I Bonds is $25 electronic and $50 paper. The maximum purchase per person per year is $10,000, total. However, up to $5,000 of that can be paper I Bonds, purchased only when filing a federal income tax return. You designate up to $5,000 of your refund toward the purchase. Electronic I Bonds are available in any amount, to the penny, from $25 to $10,000. Paper I Bonds are available in $50, $100, $200, $500 and $1,000. Purchase electronic I Bonds online at TreasuryDirect (including through payroll direct deposit). Purchase paper I Bonds when you file your federal tax return.

Cashing Out

You can cash your Series I Bonds any time after 12 months. You receive the original purchase price plus interest earnings. I Bonds are meant to be longer-term investments; if you redeem an I Bond within the first five years, you’ll lose your last three months’ interest. For example, if you redeem an I Bond after 18 months, you’ll receive the first 15 months of interest. “I think the primary risk is the one-year lockup,” Ferguson said. “Other than that, the threemonth interest penalty from years two through five shouldn’t be too much of a deterrent. Additionally, there is no guarantee of rate, considering it adjusts to the rate of inflation.” For more information, visit www.treasurydirect. gov/indiv/products/prod_ibonds_glance.htm. You can reach Vance Wealth at vancewealth.com.