What Are I Bonds.note¶
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What Are I Bonds?
Everything You Need to Know to Earn Nearly 10% Interest
These government savings
bonds offer a guaranteed return, but the rules can get complicated
Photo Illustration: SAM
KELLY/THE WALL STREET JOURNAL, ISTOCK (3)
By
Veronica Dagher
April 21, 2022 8:10 am ET
The case for buying I Bonds
is simple: A guaranteed interest rate that will rise to nearly 10% in
May.
I Bonds are
inflation-adjusted U.S. savings bonds. Americans snatched up nearly $11 billion
in these bonds over the past six months, compared with around $1.2 billion
during the same period in 2020 and 2021, according to Treasury Department
records. That figure will likely rise even higher when the interest rate jumps
next month.
But...
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The case for buying I Bonds
is simple: A guaranteed interest rate that will rise to nearly 10% in
May.
I Bonds are inflation-adjusted U.S. savings bonds.
Americans snatched up nearly $11 billion in these bonds over the past six
months, compared with around $1.2 billion during the same period in 2020 and
2021, according to Treasury Department records. That figure will likely rise
even higher when the interest rate jumps next month.
But understanding how, when
and how much of these bonds to buy can get tricky. For example, you don’t want
to face any early withdrawal penalties.
To help untangle the rules
and strategies for making the most of I Bonds, here are answers to some of the
most frequently-asked questions posed by Wall Street Journal readers.
When is the best time to
buy I Bonds and should I purchase my entire $10,000 annual allotment all at
once?
The interest on U.S. Treasury
Series I Bonds is currently 7.12% and will rise to about 9.6% beginning in
May. There is a $10,000 annual limit per person for I Bonds, yet there
are certain strategies to exceed that
ceiling.
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The I Bond interest rate is
based on a calculation tied to the consumer-price index. Prices rose by 8.5% year over year in
March,
the fastest pace since December 1981, according to the Bureau of Labor
Statistics.
Some economists say inflation
may have peaked, and if that is the case, the interest rate on I Bonds might
start to fall as the rate of inflation falls.
I Bonds will be subject to at
least one rate change in a 12-month period. Elliot Pepper, a financial planner
in Baltimore, doesn’t know what the next rate after 9.6% will be. So, he’ll try
to mitigate the risk that it will be lower than 7.12% by taking half of his
annual limit and “locking in” the combined 7.12% and 9.6% and then buying the
remaining $5,000 in late October, when he has more visibility about the next
rate.
If the rate then is lower
than 7.12%, Mr. Pepper said he would have been better off investing his $10,000
maximum before May. If the rate is higher than 7.12%, he would have been
better off buying the bonds after May, he said.
There’s an investment that’s
100% backed by the U.S. government, never loses its value and is paying more
than 7% interest a year. So, why haven’t most Americans heard of Series I
Savings Bonds? WSJ’s Dion Rabouin explains. Photo: TNS/Zuma Press
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When is I Bond interest
paid?
Interest is paid in a lump
sum when the bond is cashed.
An I Bond earns interest
monthly from the first day of the month in the issue date, so if you purchase a
bond on April 20, you would get interest for the entire month of April, said
Pamela Ladd, senior manager for public accounting for the American Institute of
Certified Public Accountants.
The interest, which is
compounded twice a year, accrues for up to 30 years or until you cash the bond,
whichever comes first, said Ms. Ladd.
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For instance, if you bought
an I Bond for $10,000, the principal value is $10,000. If after six months, you
have earned about $356 at an interest rate of 7.12%, then the government will
add that to your principal value and the next six months you will earn interest
at an annualized rate of about 9.6% on roughly $10,356, said Mr. Pepper.
I didn’t use my tax refund
to purchase $5,000 in I Bonds when I filed my tax return. Is it too late to buy
I Bonds with my refund money?
Yes. Up to $5,000 of your tax
refund is eligible to be put into I Bonds a year, under the Internal Revenue Service program. You can
still buy up to $10,000 in I Bonds this year if you haven’t already done so.
The option to buy up to $5,000 more with your tax refund is a separate
program.
But if you already filed your
return for the year and didn’t opt to purchase I Bonds with any refund money,
it is too late. Form 8888 (used for allocating a refund to an
I Bond) isn’t permitted if filing an amended tax return, said Mr. Pepper.
When is the soonest I can
redeem my I Bonds?
You can cash out I Bonds
after 12 months but there will be a penalty equal to three months of interest
if you cash out in the first five years. I Bonds earn interest for up to 30
years.
You can cash a minimum of $25
at a time, and must leave at least $25 in your TreasuryDirect account when
doing partial redemptions.
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How do I buy I Bonds for
my children?
Children under 18 can own I
Bonds, however they can’t open a TreasuryDirect account, said David Stolz, a
certified public accountant in Tacoma, Wash.
SHARE YOUR THOUGHTS
Have you invested in I
Bonds? Why or why not?
A parent may open an account
for the child and the account will be linked to the adult’s account, which will
allow them to buy electronic I Bonds in the name of the child. These I Bonds
would be purchased under the child’s name and Social Security number, he
said.
The annual I Bond purchase
limits are based on the recipient, not the giver. The child could receive up to
$10,000 in electronic I bonds and up to $5,000 in paper I Bonds a year.
How do I purchase I Bonds
in my trust?
You can add an additional
$10,000 to the annual I Bond purchase limit with a properly registered trust,
said Mr. Stolz. When you register your account at TreasuryDirect, you have the option to
create an entity account, including trusts and partnerships.
Trusts require an account
manager that can act alone on behalf of the trust and the wording in the
registration must specifically identify the trust, he said.