Oh, Brother! The Art Of Investing In I Bonds
Alright, so let’s talk about inflation. Have you noticed you’re coughing up a few more nickels for your morning cup of joe lately? Scary, isn’t it? Well, there’s an old player back in town that could help you protect those precious pennies from the incessant inflation gnawing away at your finances. Welcome to the world of Series I savings bonds, my friend.
Also known as I bonds— yes, it’s a very imaginative name— these bad boys provide a bunker against stock market rollercoasters and the money-munching effects of rising prices. Factors that drain the lifeblood out of the poor souls condemned to ordinary savings accounts.
Let’s chat about how the I bond’s total interest rate is pretty much hitched to inflation. This pesky inflation has been acting all high and mighty recently, which has bumped the current yield to a respectable 5.27% (and that’s rolling till April 2024). This includes a “fixed rate” of 1.3% which, lucky for you, can be locked in for a whopping 30 years.
With their stellar safety record and enticing interest rates, I bonds might seem like a no-brainer, right? But be warned, the purchasing process is a real nail-biter. Plus, there are a handful of key considerations to wrap your head around before throwing yourself into the I bond arena.
HOW TO BUY SERIES I BONDS
So, you’ve decided to hop onto the I bond train? Excellent! The U.S. Treasury Department steers the ship in terrain of I bonds and offers two key ways to purchase them. Mostly, folks get their share of I bonds online from the wholesome website of TreasuryDirect.gov, where they distribute bonds in their Sunday best
of digital form. But for those longing for a blast from the past, there exists a slightly convoluted route to grab physical I bonds as well. Short on attention span? Buckle up, because we are about to dive into the nuts and bolts of both processes.
BUYING I BONDS DIGITALLY
Step 1: CREATE AN ACCOUNT ON TREASURYDIRECT
The spirit of the 21st-century digital revolution rings true even in the treasury bond market. If you’re not about to file your tax return and mull using a refund to buy bonds, then the digital I bond should be your ball game.
The only backstage pass to this show is the TreasuryDirect portal. Now, remember TreasuryDirect’s slightly aging website— you’re in for a wild time-travel experience back to somewhere around 2004. So, get ready to navigate through cascading windows and nebulous menus. Setting up an account— if you’re meticulous with all your details— should take you roughly 20 minutes. Does it feel like we’re stuck in peak dial-up internet times? Absolutely! Is it worth the minor inconvenience? You betcha!
All set? Great! Visit the website’s homepage and click on the button screaming “open a new account” (I bet it’s hard to miss!). Choose a “TreasuryDirect” account— sidestep the FedInvest or SLGSafe options like they’re floor lava. Follow instructions, hand in your private intel, but not without thinking about the serious perjury implications.
Get these details handy:
- Your full name
- Date of birth
- Home address
- Social Security number (a.k.a your tax ID)
- Bank details for the account you want linked to your TreasuryDirect account
- Your bank’s routing and account numbers
Pro Tip: Double, triple, quadruple check your bank account details. The hoops you’ll have to jump through to change linked accounts later are close to Olympic standards.
Step 2: SIGN IN TO YOUR TREASURYDIRECT ACCOUNT
It’s a red-letter day! Once you’ve got your account all set up, an account number should flutter into your inbox, which then doubles as your username. Now, treat this like a state secret— guard it with your life.
Account numbers have a pattern— a letter followed by nine digits, like Z-987-654-321. So don’t blame me if you’re expecting an intricate Da Vinci code. Rumble back to TreasuryDirect, feed in these digits, and viola! You’re in. You’ll also stumble upon a one-time password (OTP), courtesy of an email, for the maiden voyage on your chosen device.
Important: While feeding in your account password, punch in each character manually using the on-screen keyboard— it’s like a fun bonding exercise between human and machine! And relax, it’s not case sensitive.
Step 3: PURCHASE DIGITAL I BONDS
Get yourself comfy in your dashboard, and prepare for liftoff. First, choose the “BuyDirect” tab, then select “Series I” within the Savings Bonds section, and pop in the cash you’d like to invest.
Keep in mind the Uncle Sam of I Bonds has set a yearly cap— you can only buy up to $10,000 in digital I Bonds per calendar year. However, you’ve got the freedom to invest anything upward of $25 and can be as specific as a penny (for instance, $33.33).
Hit submit after a good check. Orders are put through on the same day, but you’ve got the choice to set your own rhythm of weekly, monthly, quarterly, or custom recurring buys. Just be sure not to violate the annual limit of $10k!
After you’ve thrown your hat in, you’ll get an email pat on the back, and soon the bond’s value will jingle in your “Current Holdings” summary. Now that’s what I call a smooth transaction!
But wait, there’s more! If you’re feeling especially generous, you may also gift I bonds— up to $10,000 per recipient annually— on top of your own personal allotment.
BUYING PAPER I BONDS
Now let’s turn the clock back. As of December 31, 2011, our dear Treasury Department hit the brakes hard on most sales of paper I bonds at banks and other establishments.
These days, the only way to get a taste of nostalgia with paper I bonds is to summon the IRS Form 8888 when filing your tax return. You can happily channel your inner philanthropist and allocate part or all of Uncle Sam’s refund towards I bonds. This way, you can stack up to $5,000 in paper bonds, but in granular increments of $50 (like $50, $100, $150…you get the drift!).
This paper bond limit is a cherry on top of the $10,000 cap for electronic bonds. By my reckoning, in an ideal world, you could potentially purchase up to $15,000 in I bonds each year, if you’re looking at a $5,000 refund.
Important caveat: This can be done only by taxpayers expecting a refund. If there’s a snafu in your return reducing your refund, your I bond order gets the guillotine. Conversely, if your refund shows upward mobility, the bond purchase still sails smoothly.
Expect the paper I bonds to knock on your door within a few weeks following IRS’s processing of your return. Once IRS parties with your filing and sends payment for a joyride to the Treasury Retail Securities Site in Minneapolis, you should get a delivery with the bonds in about three weeks.
WHAT ARE I BONDS?
If you just got an appetite for Series I bonds, you’re asking the right questions. I bonds are like golden tickets to the Treasury Department’s magic factory of U.S. savings bonds. They’re the fairy godmothers that protect your purchasing muscle from the villains of inflation.
Even when the Treasury inaugurated I bonds back in 1998, they had a clear vision: “I Bonds are designed to offer all Americans a way to save that protects the purchasing power of their investment while assuring them a real rate of return over and above inflation.”
In simple English, financial professionals describe I bonds as savings accounts on steroids, courtesy of the protection they offer against inflation and the federal government as a guarantor.
While every investment rides a rollercoaster of risk, I bonds sit at the kiddie end of the ride, as per Zvi Bodie, financial writer, and Professor Emeritus at Boston University. Believe it or not, Uncle Sam has never left bond payments in the lurch – even during the gravest of conflicts.
HOW DO I BONDS WORK?
I bonds are like delicious cupcakes, with two yummy layers of interest rates: one layer is refilled every six months (May and November) and the other stays just the way it was when you bought it. Yummy isn’t it? Currently, these two combine to yield 5.27%.
Here’s your sneaky peek into how the recipe works:
- Variable Rate: Adjusted every six months, this layer is made of fresh inflation data. The rate will wobble up and down with inflation after you buy your I bond. If inflation goes up, so does the sprinkle of your yield; if it coils back, your rate shrinks, but never below zero. So let deflation roll, you’re secured!
- Fixed Rate: This is the stable base of the cupcake, which stays put for up to 30 years from the date you purchase the bond or until you gobble the bond up, whichever comes sooner.
If you buy I bonds now, you can bite into the fixed rate at 1.3% (the juiciest since 2007), and chomp on that for the entire life of your bond. This rate is paired with the variable rate to offer you the complete cupcake of your total return.
These rates ensure that your cupcake stays just as sweet over time, if not even more delectable. When inflation decides to go on vacation, rest assured — you will continue to earn the fixed portion.
ARE I BONDS A GOOD INVESTMENT?
If you consider the recent bout of rampant inflation and digital safe-houses that money can buy, I bonds definitely shine bright under the spotlight. Yet, no investment is the dreamy Prince Charming without a dark side.
Tax advantages are the crowning jewels of I Bonds, akin to the redeeming virtues of fairy tale villains. The interest accrued is immune to the grip of state and local taxes, and the federal taxes can be dodged till the bonds are redeemed. If you’re footing the bills for someone’s college, the federal income tax on interest could be completely waived off, like magic!
Interest on I bonds grows monthly and compounds twice a year. And you know what? The Treasury is a fair player, and it gives you a full month’s interest whether you buy on the first or last day of the month. Gotta love ’em for that!
Quick notes: I bonds have a gluttony clause; they can’t be cashed in the first year, except for rare emergencies. If you decide to close shop within five years, you lose the last three months of earned interest.
There’s also a glass ceiling on how much you can stack in I bonds each year, (10k for electronic and 5k for paper bonds through tax refund). More often than not, the average Joe hardly swims in tax refunds large enough for the full paper bond amount, so reaching the $15,000 cap is like shooting for the moon.
So, what’s the bottom line? Well, experts mostly side with I bonds for folks who want to shield their savings from inflation monsters and aren’t in a hurry to liquidate their funds. That makes it a tad unsuitable for those looking to make a quick buck or those who haven’t built up an emergency nest egg.
Pros
- Annualized interest rate currently feathering the nest at 5.27%
- Built to safeguard your cash from inflation gremlins
- Interest is tax-free in the local land and can be put on snooze on federal turf
- No federal tax landmines if used for legitimate education spending
- Relatively liquid after crossing the one-year mark
- A long-lasting option with a 30-year maturity period
- Backed by the full credit of the U.S. government— a pretty solid safety net!
Cons
- Little scope for brow-raising capital gains
- A cap of $15k in annual investments (5k of which hinges on your tax refund)
- No escape room in the first year of holding (except for emergencies)
- A penalty of three months’ interest if you skip out within 5 years
- Not as easy to get your hands on as a regular savings account
SHOULD YOU BUY I BONDS NOW?
So, is it time to jump on the I bond bandwagon? If your compass points towards a safe, long-term journey, it’s indeed a fantastic time to add I bonds to your portfolio. As of now, they’re serving a delicious annualized yield of 5.27% until May 2024.
Getting your hands on I bonds before the next rate revision ensures you a slice of this rate for the first six months. Sit back and watch as the earned interest compounds and adds to your investment, with a fresh rate in May based on the inflation winds.
And by committing to I bonds now, you can lock in the current fixed rate of 1.3% to ride out inflation for up to 30 years— helping your investment bulk up in the long-run.
Just for comparison, the FDIC reports that the average national savings account interest rate plummets to 0.46%. The average one-year certificate of deposit (CD) isn’t shining any brighter either, offering only about 1.79%.
Nowadays, although you might catch a break with better rates at some banks or credit unions, most are still easily outnumbered by the present I bond rates.
So, do the math. If you think inflation is getting too big for its boots and you’re completely aware of the withdrawal terms, I Bonds remain a hard-to-beat option— even after falling from their dizzying heights.
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