Eyes on I-bonds: As described in the extensive post (link below) from Michael Kitces’ Nerd’s Eye View blog, I-bonds are bonds issued by the U.S. Treasury that pay an interest rate partially pegged to inflation. The rate resets every 6 months, on November 1 and May 1. They are primarily purchased electronically using an online treasury direct.gov account.
Nerds Eye View post on I-bonds: https://bit.ly/3p87K5Z
TreasuryDirect site to purchase I bonds: https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
I-Bonds Historic High Rate
For November 1, 2021 – May 1, 2022 I-bonds will pay a whopping 7.12% annualized rate (so 3.56% for six months). This is the highest rate since May 2000. Read below and more above at the Kitces and Treasury links for the tradeoffs, risks, disclosures, and caveats. If you’re ok with those, a $10,000 investment might net at a minimum, a few extra hundred dollars above what you’re earning in a high-yield savings or money market account until May 1, 2022, from bonds backed by the US.
Doubling Up in December/January
As described further in the article, individuals are limited to $10,000 in electronic I-bond purchases per calendar year. Therefore, you could max out your limit by December 31, 2021, then do it again on January 2, 2022, for a total investment of $20,000 per person.
Doubling Up Or More By Household Members
The limit is per person. So two family members could each purchase $10,000 in separate Treasury Direct accounts. The same goes for children. Read the Kitces article for examples of calculating this using jointly-owned accounts and naming “primary owners.”
Buying Additional Paper I-Bonds
Another $5,000 in paper I-bonds on top of the $10,000 annual limit on electronic I-bonds can be purchased via an income tax refund. To take advantage of this, if you have paid in or withheld taxes for 2021 exactly equalling what you will owe, then you could send in a $5,000 estimated payment for January 15. The $5,000 will be calculated as a refund when you file your 2021 taxes. Instead of a refund, you can use the $5,000 to have paper I-bonds sent to you. Then you can convert them to electronic bonds. Bear in mind that, by this time, the 7.12% annualized rate will be about to change on May 1. So this may or may not be worth the effort.
Holding Periods for I-Bonds
You cannot sell (called “redeeming”) the I-bonds for the first 12 months after purchase. So in a worst case scenario, you will earn the annualized rate only until May 1, 2022, inflation goes away, and the rate drops to 0%. You would earn no interest for the rest of 2022 (or 12 months since your purchase) until you could redeem the bonds.
If you redeem the I-bonds between the 1st and 5th year after purchase, you lose the last 3 months of interest. (So if the worst case scenario above occurs, you would lose 0 interest because the rate was 0%).
After the 5th year there is no cost of redemption.
Short-Term Pain for Short-Term Gain
When you add up what you could gain over the next 12 months by holding I-bonds and compare to the effort involved to purchase the I-bonds, the short-term pain may not be worth the gain. But for those who enjoy an opportunity to make a few hundred extra dollars, it just might be.
