The demand for Series I bonds, an inflation-protected and nearly risk-free asset, has skyrocketed as investors seek refuge from soaring prices and stock market volatility.
While annual inflation rose by 8.6% in May — the highest rate in more than four decades, according to the U.S. Department of Labor — I bonds are currently paying a 9.62% annual rate through October.
That's especially attractive after a rough six months for the , which plummeted by more than 20% since January, capping its worst six-month start to a year since 1970.
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'It's like going to the DMV online': What to know about buying Series I bonds via TreasuryDirect
Indeed, since the annual I bond rate jumped to 7.12% in November, 1.85 million new savings bond accounts have opened through June 24, according to Treasury officials.
"I bonds are a wonderful tool for both cash reserves and investment portfolios," said certified financial planner Byrke Sestok, co-owner of Rightirement Wealth Partners in Harrison, New York.
Backed by the U.S. government, I bonds won't lose value. And if you're comfortable not touching the money for 12 months, the current rate "dwarfs" other options for cash reserves, he said.
Still, there are nuances to consider before piling money into these assets. Here are answers to some of the trickier I bond questions.
1. How does the interest rate on I bonds work?
I bond returns have two parts: a fixed rate and a variable rate, which changes every six months based on the consumer price index. The U.S. Department of the Treasury announces new rates on the first business day of May and November every year.
With inflation rising over the past year, the variable rates have jumped, increasing to an 7.12% annual rate in November and 9.62% in May. However, the initial six-month rate window depends on your purchase date.
For example, if you bought I bonds on July 1, you'll receive the 9.62% annual rate through Dec. 31, 2022. After that, you'll begin earning the annual rate announced in November.
2. How do I pay taxes on I bond interest?
While I bond interest avoids state and local levies, you're still on the hook for federal taxes.
There are two options for covering the bill: reporting interest every year on your tax return or deferring until you redeem the I bond.
While most people defer, the choice depends on several factors, explained Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
All of these decisions come back to the ultimate purpose of this investment.
Tommy Lucas
Financial advisor at Moisand Fitzgerald Tamayo
For example, if you opt to pay taxes on your I bond interest every year before receiving the proceeds, you'll need another source of income to cover those levies.
However, if you've earmarked those funds to pay for education expenses, the interest is tax-exempt, so paying levies annually doesn't make sense, he said.
"All of these decisions come back to the ultimate purpose of this investment," Lucas added.
3. What happens to my I bonds if I die?
When you create a TreasuryDirect account to buy I bonds, it's important to add what's known as a beneficiary designation, naming who inherits the assets if you pass away.
Without this designation, it becomes more challenging for loved ones to collect the I bonds, and may require the time and expense of going through probate court, depending on the I bond amount, Sestok explained.
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"Personally, I make sure that my clients do it correctly in the first place," he said, explaining how adding beneficiaries upfront may avoid headaches later.
However, if you set up an account without a beneficiary, you can add one online by following the steps outlined here at TreasuryDirect. You can call support with questions, but they are currently experiencing "higher than usual call volumes," according to the website.
With a named beneficiary, I bond heirs can continue holding the asset, cash it in or have it reissued in their name, according to Treasury Direct.
The accrued interest 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 deferring interest or not, Lucas said.
FAQs
The Education Tax Exclusion
The IRS lets you avoid paying taxes on interest earned by Series EE and Series I savings bonds when you redeem them if you use the money toward qualified higher education costs for yourself, your spouse, or any of your dependents.
How do I cash an inherited US savings bond? ›
Get a certified copy of the death certificate for everyone who has died who is named on any of the bonds. Have each person who is entitled to a distributed bond also fill out and sign the appropriate forms: If they want cash for their bond: FS Form 1522. If it is an EE or I bond and they want to keep it: FS Form 4000.
What is the interest rate on the Series I bonds? ›
The composite rate for I bonds issued from November 2023 through April 2024 is 5.27%.
Are Series I bonds a good investment? ›
Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
Do I have to pay taxes on inherited savings bonds? ›
The short answer is yes, you generally will be responsible for taxes owed on savings bonds you inherit from someone else. The good news is that you may be able to defer taxes on inherited savings bonds or avoid it altogether in certain situations.
How do I avoid inheritance tax on my bank account? ›
Transfer assets into a trust
Because those assets don't legally belong to the person who set up the trust, they aren't subject to estate or inheritance taxes when that person passes away. Setting up a trust also has other financial benefits, such as helping the estate avoid probate.
Where can I cash a US savings bond without a bank account? ›
If you have a paper savings bond but your bank can't cash it, you'll need to redeem it online at TreasuryDirect or at a financial institution that will cash savings bonds for non-account holders.
What documents do I need to cash a savings bond? ›
In addition to the bonds, you'll need to provide proof of identity, like a United States driver's license, and partner with a notary to notarize and certify your signature on an unsigned FS Form 1522 to your local bank or credit union.
How do I deposit a large cash inheritance? ›
A good place to deposit a large cash inheritance, at least for the short term, would be a federally insured bank or credit union. Your money won't earn much in the way of interest, but as long as you stay under the legal limits, it will be safe until you decide what to do with it.
Is there a downside to I bonds? ›
The cons of investing in I-bonds
There's actually a limit on how much you can invest in I-bonds per year. The annual maximum in purchases is $10,000 worth of electronic I-bonds, although in some cases, you may be able to purchase an additional $5,000 worth of paper I-bonds using your tax refund.
Bottom line. If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you're saving for education, I-bonds may be the way to go.
How much is a $100 savings bond worth after 30 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
If you're investing for the long term, a U.S. savings bond is a good choice. The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases. If you're saving for the short term, a CD offers greater flexibility than a savings bond.
Will bonds go up in 2024? ›
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
Do Series I bonds ever lose value? ›
Question: Can you determine what the value of a Series I bond will be in future years? inflation rate can vary. You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline.
Who pays taxes on inherited EE savings bonds? ›
If the executor doesn't include predeath interest on the decedent's final return, then the beneficiary owes federal income tax on all pre- and post-death interest on the earlier of the bond's maturity or redemption.
Can I cash my deceased parents savings bonds? ›
TO CASH BONDS FOR A DECEDENT'S ESTATE:
Series EE, Series E, and Series I bonds can be cashed at a local financial institution. Some of these transactions may have to be forwarded for further processing. Series HH and Series H bonds must be sent to one of the addresses shown at the bottom of the following page.
Who pays taxes on gifted EE bonds? ›
If ownership has not changed
| Situation | Who owes the tax |
|---|
| You use your money to buy a bond that you put in your name with a co-owner | You owe the tax |
| You buy the bond but someone else is named as the only owner (for example, your child) | The person who is named as the owner (not you) |
3 more rowsCashing them all in now and dealing with the tax is probably a good way to go. Let's start with just ones that were issued in 1994 or later, where no penalty would be involved. The interest would hit your 2024 taxes, which would have to be filed by April of the following year.
