Serious investors know to pass up investments that sound too good to be true -- say, for example, a 9.62% return in today's market.
It just so happens that the U.S. Treasury is offering precisely that: A bond issued by the Treasury, backed by the U.S. government, available for purchase now, with a quoted "current rate" of 9.62% annualized (see tinyurl.com/3rnmsunt). The instrument is the Series I savings bond.
According to TreasuryDirect, a website run by the U.S. Department of the Treasury's Bureau of the Fiscal Service, the rate is good for six months starting with the time you purchase the bond -- if you buy the savings bond on July 1, 2022, the annualized rate of 9.62% is applied through Dec. 31, 2022. Then, the rate is reset for another six months, and every six months for as long as you own the bond.
How is the return rate calculated? It is a combination of a fixed rate of return and an inflation rate calculated twice a year. For the current I bond, the fixed rate is 0.00%. The semiannual inflation rate is 4.81%, which is doubled, bringing the overall composite rate to 9.62%.
If you are hankering to pick up some I bonds, study the historical rates first (tinyurl.com/2tyed5ks). Notice that the fixed rate applies for the life of the bond, while the inflation rate resets every six months for "all I bonds ever issued."
In addition, study the inflation rates in the table. The May 1, 2022, rate at 4.81% compares to 1.77% a year before (May 1, 2021) and 0.53% a year before that (May 1, 2020).
Then, review the "composite" rates (fixed plus inflation) going back to 1998. With 30-year maturities, those initial I bonds from September-October 1998 that are still in the hands of savers are currently receiving 13.18% composite rates. (If we enter a deflationary period, the combined rate can be lower than the fixed rate, but by design, the composite rate will not go below zero.)
When I say "receiving," let me explain: These savings bonds don't pay out a distribution. Instead, the composite rate increases the value of the bond.
While the bonds have maturities of 30 years, you can surrender them earlier -- after one year. There is a penalty if you cash them before five years: You will lose the previous three months of interest. For example, if you cash an I bond after 24 months, you will only get the interest for the first 21 months.
To buy I bonds electronically, first create an account at TreasuryDirect.gov (see the guided how-to tour at tinyurl.com/569wyu76).
You can then make your purchase using BuyDirect. Savings bonds generally are issued to your account within two business days of the purchase date.
There are limits to how much you can buy for yourself: up to $10,000 in electronic I bonds each calendar year, and up to $5,000 in paper I bonds (by using your federal income tax refund -- see tinyurl.com/mbnm6k9v), for a total of $15,000. To read more, go to TreasuryDirect's "How Do I ...?" section at tinyurl.com/m7mjmrk7. You can also buy I bonds for others. See, Savings Bonds as Gifts (tinyurl.com/2p8vucfs).
Finally, what about taxes? The interest on I bonds is subject to federal (but not state or local) income tax. You can either report interest yearly (use the Savings Bond Calculator at tinyurl.com/2p9xseuu to find the amount for paper bonds; for electronic bonds, check your TreasuryDirect account), or when you cash in the bond. You'll receive an IRS Form 1099-INT from the Treasury reporting taxable interest earned on the bond.
What's the bottom line? As with all investments, there are essential elements to understand. With these savings bonds, you need to accept that the composite rate will change every six months. Today's 9.62% annualized rate will almost certainly be a different rate for the next six months and beyond. With that in mind, I bonds should definitely be of interest to many people who have $10,000 to sock away.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION