Posted on Sunday, 16th May 2021 by Dennis Damp
Print This PostWould you like a secure government backed investment that currently yields 3.54%? If so, consider buying U.S. Series I Bonds. They are paying this rate from May of this year through November. The previous six-month rate was 1.6%, well above what banks were offering for CDs at the time. With inflation on the horizon, due to excessive deficit government spending and other factors, savings bond rates and our 2022 COLA could increase significantly.
I Bond interest is compounded semiannually. Every six months from the bond’s issue date, all interest the bond has earned in previous months is added to the bond’s new principal value. Interest is earned on the new principal for the next six months.
There are few places to invest today that offer a decent return on capital. Our local bank is only paying .1% on our savings accounts. Before the pandemic you could find CD rates hovering above 2%, still meager by any standards, but much better than low rates offered today.
The first I bond I purchased was in 1999 for $200; it’s worth $448.56 today. Those early bonds had a large fixed rate and combined with the current inflation rate they pay over 5% interest today. The best way to save is to do it automatically through payroll deductions which I started in 1975. Back then I purchased E bonds, which are currently earning only .10%. Regardless of the current E Bond rate, at 20 years the E Bond will be worth twice what you paid for it. If you keep the bond that long, the Treasury makes a one-time adjustment to the E Bond’s face value. This provides approximately a 3% yield if held for 20 years.
I Bonds are purchased at face value, a $500 bond costs you that amount, E Bonds are purchased at half face value and if held for 20 years double to the face value amount. Savings bonds can’t be cashed in during the first year of ownership, they can be redeemed after 12 months. if you redeem an I bond within the first 5 years, you’ll lose your last 3 months interest. For example, if you redeem an I bond after 18 months, you’ll receive the first 15 months of interest.
Savings bonds mature after 30 years and stop earning interest. The advantages of I Bonds include interest earned is tax deferred until you cash them in, they are guaranteed by the government, and provide an inflation hedge.
I Bonds can only be purchased online with purchases limited to $10,000 yearly per account holder throughTreasury Direct. Both you and your spouse can purchase up to this limit if you have individual accounts. The Treasury stopped issuing paper bonds over a decade ago with the one exception. They allow you to purchase up to $5,000 in paper I bonds with your income tax return.
If you still have paper bonds most banks will cash them in and provide a 1099-INT form for the interest earned. The interest has to be reported on your tax return at the end of the year. When cashing out your bookentry online bonds, the Treasury will send out a 1099-INT statement and route the proceeds direct to your savings or checking account. When electronic I Bonds in a TreasuryDirect account reach maturity and stop earning interest, they are automatically cashed and the interest earned is reported to the IRS.
I Bonds are a safe haven to stash some of your cash as long as you don’t need if for the first year you own the bonds.
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