Demand for Series I bonds, an inflation-protected and nearly risk-free asset, has skyrocketed as investors seek refuge from rising prices and stock market volatility.
whereas Annual inflation up 8.6% in May – the highest rate in more than four decades, according to the US Department of Labor – I bonds are currently paying a 9.62% annual rate through October,
This is especially attractive after roughly six months. S&P 500which fell more than 20% since January, capping its Worst six-month start for a year since 1970,
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‘It’s Like To Go To The DMV Online’: What To Know About Buying Series I Bonds Through TreasuryDirect
Indeed, the annual I bond rate rose to 7.12% in November, according to Treasury officials, with 1.85 million new savings bond accounts opened through June 24.
“I-bonds are a wonderful tool for both cash reserves and investment portfolios,” said certified financial planner Bierke Sestok, co-owner of Rightment Wealth Partners in Harrison, New York.
Backed by the US government, the value of I bonds will not decrease. And if you’re comfortable touching money for 12 months, the current rate “dwarfs” other options for cash reserves, he said.
Still, there are nuances to consider before depositing money in these properties. Here are answers to some of the trickier I Bond questions.
1. How does the interest rate work on I bonds?
I bond returns have two parts: a fixed rate and a variable rate, which change every six months based on the Consumer Price Index. The US Treasury Department announces new rates on the first trading day of May and November every year.
With inflation rising over the past year, there has been a jump in variable rates, rising to a . It is done 7.12% annual rate in November And 9.62% in May, However, the initial six-month rate window depends on the date of your purchase.
For example, if you bought an I bond on July 1, you would receive an annualized rate of 9.62% as of December 31, 2022. After that, you’ll start earning the annual rate announced in November.
2. How do I pay taxes on I Bond interest?
While the I bond avoids interest state and local levies, you are still on the hook for federal taxes.
There are two options for covering the bill: reporting the interest each year on your tax return or deferring the I bond until redemption.
While most people avoid, the choice depends on a number of factors, explained Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
All these decisions come back to the ultimate objective of this investment.
Tommy Lucas
Moisand Fitzgerald Tamayo. financial advisor in
For example, if you choose to pay taxes on your I bond interest every year before you receive the income, you’ll need another source of income to cover those levies.
However, if you have earmarked those funds pay for education expensesThe interest is tax-free, so there is no point in paying the annual fee, he said.
“All of these decisions come back to the ultimate purpose of this investment,” Lucas said.
3. What happens to my I Bond if I die?
When you a. make up TreasuryDirect account for buying I bondsIt’s important to add what is known as a beneficiary designation, naming who inherits the assets if you die.
Without this designation, collecting I bonds for loved ones becomes more challenging, and depending on the I bond amount, going through probate court may require time and expense, Sestoke explained.
“Personally, I make sure my clients do it the right way in the first place,” he said, explaining how adding beneficiaries in advance can save headaches later.
However, if you open an account without a beneficiary, you can add one online by following the steps mentioned here at TreasuryDirect. You can call support with questions, but they are currently experiencing “above normal call volume”, according to website,
With a designated beneficiary, I can continue to inherit the bond property, cash it or reissue it in my own name, According to Treasury Direct,
Interest earned up to the date of death can be added to the original owner’s final tax return or the heir’s filing. Either way, the beneficiary can decide whether to keep the interest deferred, Lucas said.