In a world where the stock market is unpredictable and interest rates are rising, many investors are looking for someplace to put their money that is as close to risk-free as possible — even if it means forgoing the chance for a bigger reward. One increasingly popular pick are I Bonds, savings bondsissued by the U.S. government. These bonds are virtually risk free and have a robust fixed interest rate. There is generally a $10,000 limit per year for purchasing I Bonds, but there are a few ways to get around this limit.
For more help working I bonds into your financial strategy, consider working with a financial advisor.
Understanding I Bonds
I Bonds are issued by the federal government and carry a zero-coupon interest rate — plus, they are adjusted each year for inflation. The variable return will sit at 5.27% through April 2024. Unlike other U.S. securities, these bonds are sold at face value. This means if you purchase a $100 bond, the price will be $100. The bond duration runs from one year to 30 years.
Interest is paid every month and compounds every six months. The following deadlines apply to I Bonds:
- Within one year of purchase: You cannot cash the bond.
- Within one year and five years of purchase: You can cash the bond but forfeit the previous three months’ interest payments. This is known as “early redemption.”
- After five years of purchase: You can cash the bond with no penalty.
- After 30 years of purchase: The bond ceases to pay interest.
You don’t have to cash the bond after 30 years, but it will start to lose value against inflation. Unfortunately, there is a limit to how much you can buy each year, for yourself, in these bonds. That doesn’t mean you can’t get around that limit, though, depending on your situation.
How to Get Around the $10,000 I Bond Limit
These bonds are popular, but there is a limit of $10,000 per year that an individual can purchase. That said, there are some loopholes you can exploit if you want to put even more money into these bonds to nab that healthy 5.27% yield. Here are the most popular methods or loopholes:
1. Tax Refunds
If you are expecting to get a tax refund, you can purchase an additional $5,000 in I Bonds with the money the government owes you. There is one catch, though as they have to be paper I Bonds, not the more popular digital I Bonds. While this adds a bit of complexity, you can eventually convert these paper bonds to digital ones down the line.
2. Buying for Multiple Members of the Family
The limit is per person, so if you’re married then each spouse is allowed to purchase $10,000 in I bonds (plus the paper bonds if they have a tax return). You can also purchase up to $10,000 in I Bonds for your children, but they must be used for the child, possibly as a college savings tool.
3. Businesses and Trusts
Entities like businesses and trusts can also purchase up to $10,000 in I Bonds. This means that if you own a business and you have a living trust, you can purchase up to $30,000 in additional I Bonds each year.
While any of these can be a good way to increase the amount of I Bonds you’re able to buy, using multiple options together can help you maximize the number of bonds you’re able to purchase and earn the current high yield on.
Bottom Line
I Bonds are a virtually risk-free investment, which makes them very popular in times of market uncertainty such as right now and as inflation devalues your cash. That said, there is a $10,000 limit each year for purchasing them. There are several ways around this limit, though, including using your tax refund, having your spouse purchase bonds as well and using a separate legal entity like a trust. Finding the right solution(s) for you can increase the amount of “free money” you’re able to receive on these nearly risk-free investments.
Investing Tips
- For help using I Bonds as part of your strategy, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Building a dividend stock portfolio is another way to use investments to create income.
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I've spent considerable time navigating various investment landscapes, including the intricate world of U.S. government-backed securities. The mention of I Bonds—treasury-issued savings bonds—sparks my interest.
I Bonds, indeed, offer a near risk-free haven for investors, tied to a robust fixed interest rate while also adjusting for inflation. Their structure involves a zero-coupon interest system with variable returns, currently sitting at 5.27% through April 2024. These bonds are distinctive in that they're sold at face value, unlike other U.S. securities, meaning a $100 bond is purchased for $100.
Interest accrual occurs monthly and compounds semi-annually. Redemption timelines are critical; within the first year, the bond can't be cashed, while within one to five years, early redemption is allowed but forfeits the previous three months' interest payments. After five years, the bond can be cashed penalty-free, and after 30 years, it stops accruing interest, although it doesn't have to be cashed immediately, although it starts losing value against inflation.
The $10,000 annual limit per individual poses a constraint, yet strategies exist to bypass this cap. Tax refunds offer a loophole; one can purchase an additional $5,000 in paper I Bonds using the refund money. Similarly, leveraging family members—each spouse can buy $10,000, and parents can acquire bonds for their children (usually for their benefit, like college savings)—extends investment potential.
Moreover, entities like businesses and trusts are eligible to purchase up to $10,000 in I Bonds individually. For instance, if you own a business and possess a living trust, you can access an additional $30,000 annually. Combining these methods amplifies purchasing capacity and capitalizes on the current high yield.
This approach aligns with risk-averse investor mindsets, particularly during uncertain market times or when inflation threatens cash values. However, exploring these opportunities wisely and customizing strategies to individual circ*mstances maximize the benefits of these nearly risk-free investments.
Lastly, advice from financial advisors can prove invaluable in structuring an investment portfolio that integrates I Bonds or delves into other avenues like dividend stock portfolios to generate income. Ultimately, understanding and utilizing these options effectively empower investors to leverage low-risk opportunities for financial growth.
