Why would anyone want to buy I Bonds? Does a guaranteed, annualized interest rate of 9.62% for the next six months do anything for you?
While you may not be a huge fan of the issuer — that would be the U.S. Treasury, a department of the U.S. government — you’re not going to find many safer sources of fixed income. After all, the Treasury has the power to create money.
How do you buy these I Bonds? It’s not as simple as buying shares of BND or VBTLX from Vanguard, but it’s not terribly complicated, either.
I recently bought Series I Savings Bonds online from Treasury Direct, and I’ll walk you through the steps. I purchased $10,000 in November of 2021, as did my wife. We repeated those purchases in January of 2022 for a total of $40,000 in I Bonds in a couple of months.
This post has been updated in late April now that it’s not possible to get the prior 7.12% rate followed by six months at 9.62%. New I Bond investors will get 9.62% (annualized) for the first six months and a to-be-determined rate in the months and years that follow. More on how that is determined below.
Why You’re Suddenly Hearing About I Bonds
These bonds are not new, but they’re newly enticing. You see, the interest rate is tied to one of the U.S. Governments measure of inflation, the CPI-U, and that’s been going nowhere but up in recent months.
For the same reason that Social Security benefits will receive a 5.9% boost as a cost-of-living adjustment for 2022, I Bonds are now paying more than they have in a long time.
For the formula and further details on how the interest rate is calculated, see the explanation at Treasury Direct.
In summary, it’s a combination of a fixed rate (currently 0%) and a variable rate, each of which are updated every six months in November and May. The fixed rate has been under 1% since May of 2008 and has not been above 2% since 2001.
The variable rate, on the other hand, has been as low as an annualized -5.56% during the Great Recession and has never been as high as it is now (9.62%) since I Bonds were first issued in 1998. That interest rate is expected to climb to 9.62% for those purchased in the six month period from May to November of 2022.
Note that the interest for every I Bond ever issued is updated every six months. Every I Bond purchased in the first two and a half years these were offered is now paying over 10% annualized for the next six months.
Understand that the interest rate for all I bonds will change in May of 2022 and every six months thereafter based on the inflation rate of the previous six months. This rate is calculated for the six months that include March and September, with the numbers released in April and October.
For a detailed look at the interest rates and how they’ve changed for I bonds issued at any time since 1998, please see this chart from Treasury Direct. Plan on zooming in on the table to actually read it; it’s a big one.
Another useful resource for looking at past performance of I Bonds purchased in the past can be found here at eyebonds.info.
Advantages of I Bonds
Interest in I Bonds is credited twice a year, but you do not pay taxes on that interest until you decide to cash out your bond. It is automatically reinvested.
This is effectively a form of tax deferral, which is different than most bonds and bond funds.
Additionally, when you do redeem your I Bonds, the interest will not be subject to state or local income taxes. A downside is that bond interest is subject to ordinary income tax rates at the federal level, which is true of most bonds, the exception being lower-interest municipal bonds.
Furthermore, if you have a modest income when your children are in college, you can redeem your I Bonds completely tax-free when you use the proceeds to cover qualified education expenses. The same is true of Series EE Bonds purchased after 1989. This interest exclusion phases out at a (MAGI) between $85,800 and $100,800 for single filers and between $128,650 and $158,650 for those married filing jointly. If you’re married and filing separately, there is no interest exclusion. Funding a 529 account is a qualified education expense.
The Interest Rate!
“High Yield” savings accounts are paying about 0.5% interest in 2021. Money market funds and typical savings accounts pay even less.
Vanguard’s Total Bond Fund yields 1.5% and the value of the underlying fund is subject to change, unlike the value of an I Bond, which can never drop (or rise) in value.
A 7.12% or 9.62% return is awfully good for fixed income at the moment. Act before the end of April, and you’ll get 8.54% over the next year.
Low Default Risk
Sure, Congress will play games and kick the can down the road, but the odds of our government actually defaulting on debts owed to investors is exceptionally low.
There was a brief default in 1979, but Treasury bill holders got their interest after a brief delay. If the U.S. government truly defaults and is never able to pay its debts, we’ve got bigger problems than not receiving interest payments on a portion of our bond allocation that year.
Disadvantages of I Bonds
Annual Purchase Limits
You’re limited to $10,000 per person in online purchases, and you can buy an additional $5,000 in paper I Bonds via your federal tax refund if you paid more in than you owed.
If you’re married, your spouse can do the same, you can make purchases in your kids’ names, and trusts can own them, too.
I’m not going to go out of my way by forming a trust or giving the government an interest-free loan by paying more than necessary towards next year’s tax bill, so I’ll settle for $10,000 a year for me and $10,000 a year for my wife. You could do this twice in succession at the end and beginning of a calendar year, as we did at the end of 2021 and beginning of 2022.
Only One Seller
You can’t buy these from your favorite brokerage, and there’s no I Bond mutual fund or ETF. That also means that there are no fees, so in some ways, this is an advantage.
It does mean that you have to create an account at Treasury Direct, so that’s a bit more to keep track of.
Illiquidity for One Year
You cannot redeem I bonds until you’ve owned them for a full year. If you choose to cash them in before a full five years has passed, you’ll forfeit 3 months of interest payments.
This 3-month interest forfeiture is actually assumed and baked in to the balance shown on your I Bonds, and they’ll credit you the missing interest in your account once you hit the 5-year mark.
Compare this to a more typical 6-12 month penalty for early withdrawals from certificates of deposit, and it doesn’t look so bad.
Buy Now or Wait?
The information in this segment applied up until the end of April of 2022. I will update the numbers in mid-October when the inflation rate (CPI-U) has been determined for the March to September, 2022 timeframe. Rather than deleting the information, I’ll leave it up as an example of how to approach the timing of I bond purchases.
If you have yet to make an I Bond purchase in 2022, you have an interesting conundrum.
If you complete your purchase before the end of April, you are guaranteed 7.12% for the first six months, at which point the interest rate will reset to 9.62% for the next 6 months.
In this case, $10,000 becomes $10,356 after six months of 7.12% interest and grows another 4.81% (that’s half of 9.62%) to become $10,854 after a full year for an 8.54% blended annual interest rate.
If you wait to buy until May, you’ll get 9.62% for the first six months and then an unknown interest rate for the following six months. That rate depends upon the rate of inflation, as measured by CPI-U, between March and September of 2022.
If semi-annual inflation rises by 3.6% or more between March and September, you’ll get 7.2% or higher interest on your I Bonds in the subsequent six months, and you’ll come out ahead for waiting as opposed to buying in April. If inflation cools off over the summer, you’ll see a lower interest rate when it resets again in November, and you would have been better off buying I Bonds in April.
Your guess is as good as mine as to which way inflation will go. My November ’21 and January ’22 purchases will be upgraded to the 9.62% rates in April and June, and I’m quite happy with an 8.54% return over 12 months. I like taking the sure thing, but if you’re convinced inflation’s not going to temper by fall, you could hold off a few weeks to make your first I Bond purchase.
I should note that your exact IRR may be a little better or worse, depending on the days of the month in which you buy or sell, so please don’t hold me to that second decimal point.
I recommend opening a Treasury Direct account now if you don’t have one yet. Some people have been asked to verify their identity, which can be a time-consuming process involving a Medallion Signature Guarantee, which is similar to getting a signature notarized, and must be done in-person with some who’s qualified to verify your identity. We did not have this issue, but I know of others who have.
I also recommend waiting until the last week of the month to make your purchase. You’ll get the entire month’s interest as long as your I bond purchase is made by the end of the month. More on that below.
How to Buy I Bonds from Treasury Direct
Step 1: Go to the TreasuryDirect website
Navigate to Individual / My Accounts. Here is the direct link: https://www.treasurydirect.gov/indiv/myaccount/myaccount.htm
Click on “Open an account” in the middle of the page.
Step 2: Choose to “Apply Now”
You’re taken to overview screen explaining the process. They’ve also got links to tutorials, but I’m hoping this one is the only one you’ll need.
You’ll find the blue “Apply Now” button at the bottom of the screen. Click it!
Step 3: Choose an Account Type
If you’re purchasing as an individual, which will be the most common scenario, click the first circle to indicate that you’re purchasing as a person rather than as a business or a trust.
If you’re not purchasing as an individual, click the appropriate circle. The Finance Buff has a tutorial for buying I Bonds in a trust, which is one way to get more than $10,000 or $15,000 per person per year.
Click the “Submit” button at the bottom once you’ve made your selection above.
Step 4: Enter Your Details
TreasuryDirect calls it Step 2, and it’s the most time-consuming step.
This is straightforward as long as you have the necessary information handy, including a Social Security number (or EIN for a business), your state-issued ID, and bank account info.
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Step 5: Don’t Perjure Yourself
Make sure you entered the correct Social Security number or EIN, that you’re not subject to backup withholding (you’d know if you are), and that you are not only a person, but a U.S. person as defined by the IRS.
Click the “Submit” button if all of this is true.
Step 6: You’ve Got an Account!
The Treasury Department welcomes you to your brand-spanking-new account, and it’s ready to use instantly. Let’s keep this party going!
Step 7: Select “BuyDirect” & “Series I”
We’re here to buy some I Bonds. Once you’ve clicked on “BuyDirect” in the menu bar at the top, turning it orange, select the circle next to “Series I” under Savings Bonds.
For the curious, they’ve got a breakdown of the similarities and differences between Series I and Series EE Bonds. EE Bonds are not adjusted for inflation and are currently paying 0.10% as of November, 2021.
Click “Submit” at the bottom once you’ve made your selection, and be sure to select Series I unless you want to give up 7.02% in interest.
Step 8: How Much Would You Like?
Remember, you’re limited to $10,000 per calendar year in online I Bond purchases. The simplest method is to invest $10,000 at once, but if that’s too rich for your blood, you can set up scheduled purchases at regular or irregular intervals.
Enter the purchase amount and date(s). Your bank information was entered earlier, and you’ll want to make sure that your account is selected in the dropdown box as the source of funds.
Regarding timing, as long as your money is in before the end of the month, you’ll earn interest for that month. You don’t earn any more interest by investing on the 1st of the month as opposed to the 31st. That said, there can be a delay of several business days, so I timed my purchase for a week before the end of the month.
When redeeming your I Bonds, it’s best to withdraw early in the month. You don’t accrue any additional interest by remaining invested beyond the 1st of the month.
Step 9: Review and Submit
Look everything over to ensure you didn’t goof anything up. If you goofed, select “Edit” at the bottom and get it right. If all looks good, click “Submit.”
Congratulations! You’ve scheduled your first I Bond purchase(s) in a few short minutes.
The next screen should be a confirmation of what you’ve set up.
You’ll also receive an email from [email protected] confirming the activity.
If you’ve got questions, ask them! I’m almost as new to this as you are. You can reach TreasuryDirect at 844.284.2676 if you can’t find the answer to your questions on the website.