Understanding the Ins and Outs of Series I Bonds

Series I Bonds have been in the headlines more than usual due to the recent rate hikes conducted by the Federal Reserve. Per the Treasury Direct website Series I Savings Bonds that were issued May 1, 2022 to October 31, 2022 offer a 9.62% interest rate. This sounds wonderful considering the low-interest rate environment we’ve been accustomed to the past decade. Before you go flocking toward this financial vehicle here are some facts that you should be aware of prior to making any decisions.

How Does a Series I Bond Earn Interest?

In simple terms, the Series I Bonds earn interest on a monthly basis. Pretty straight forward right? Interest is compounded semiannually, so every 6-months that the Series I Bond is held the bond’s interest rate is applied to a new principal value. The new principal is the total of the prior principal and the interest earned in the previous 6-months. 

How Long Does a Series I Bond Earn Interest?

Series I Bonds can earn interest for as long as you allow them to up to a maximum of 30 years. You do have the option of cashing in the I bond whenever you want, however, if you cash in earlier than 12 months you’ll not receive any interest. Series I bonds that are redeemed in less than 5-years will lose out on the last 3-months of interest. How does that work specifically?

Example: If a Series I Bond owner cashed in their bond after 18 months of owning it they would only receive 15 months of interest. 

When Do I Get the Interest on My Series I Bond and is it Taxable?

As a Series I Bond owner, you don’t technically receive your total interest earned until after the bond is redeemed. There is a different process for electronic I Bonds vs. paper I Bonds. For electronic I Bonds, the interest is paid when the bond matures (unless cashed in before then). Paper I Bonds have a more involved process where the bond owner must submit the paper bond in order to cash out. For more information on how to cash in a paper I Bond check out the Treasury Direct website here.

In simple terms, interest earned on Series I Bonds is taxable at the federal level, but not at the state and local income tax level. As a bond owner, you can choose whether to report each year’s earnings or wait to report all the earnings when you get the money for the bond. If you plan on using the money for qualified higher education expenses, there may be some tax advantages. We recommend consulting with your tax professional or CPA when making tax decisions.  For more information regarding the taxability of interest earned on Series I Bonds, please visit the Treasury Direct website here.

The Dumas Team, Consolidated Planning, Inc. Michael R. Acosta, CFP®, ChFC®, CSLP®

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How Much Does a Series I Bond Cost and What is the Maximum Purchase Amount?

There are different value limits and purchase prices for electronic I Bonds vs paper I Bonds. Electronic I Bonds can be purchased with as little as $25 or any amount above that to the penny, for example, an investor could purchase $32.87 worth of an electronic I Bond. Paper I Bonds on the other hand can only be purchased in increments of $50, $100, $200, $500, or $1,000. 

There are set maximums for how much in Series I Bonds an individual can purchase in any given calendar year. This is tracked through the use of a single Social Security Number or Employer Identification Number. Again, there are differing amounts based on whether you’re purchasing electronic or paper Series I Bonds. 

• Up to $10,000 in electronic I Bonds, and
• Up to $5,000 in paper I bonds (with your tax refund)

So What Did We Learn?

Series I Bonds are offering a great interest rate in the current bear market that we’re experiencing as investors. It isn’t as simple as allocating your funds toward an I Bond and immediately receiving the current quoted 9.62% (as of 10/11/2022). As a bond owner, it’s recommended that you own the bond for more than 12 months, but if you want to receive 100% of your potential earned interest, you’ll want to leave the Bond alone for a minimum of 5 years. If you’re interested in adding Series I Bonds to your overall financial plan I recommend speaking with your financial advisor and or tax specialist to confirm the pros and cons before you dive in. Keep in mind that the Series I Bond interest rate is expected to drop down to 6.48% as of November 1, 2022. 

This article was originally published here and is republished on Wealthtender with permission.

About the Author

Michael R. Acosta

With over 7 years of experience in the finance industry, I have focused on helping others create better habits around managing their personal finances to increase the odds of achieving their personal goals.

My clients understand that their responsibility is to continue building their wealth and my responsibility is to help them protect it at all cost. I educate others through having compassion for where they are today and provide them with options on how to achieve their goals personally, professionally, and financially.

By focusing on what we can control today we are able to build an individualized strategy that is not dependent on uncontrollable factors or assumptions, allowing our clients to live the life they love and desire.

My wife Blair and I cherish spending time with family and friends and supporting our communities establishments. We are active members at Our Lady of Grace Catholic Church in Lancaster, SC where I am a 3rd degree member of the Knights of Columbus.