As investors try to get away from rising prices and volatile stock markets, demand for inflation-protected and almost risk-free Series I bonds has gone through the roof.
The U.S. Department of Labor says that annual inflation went up by 8.6% in May. This was the highest rate in more than 40 years. I bonds, on the other hand, pay a 9.62 percent annual rate until October.
The fact that the S&P 500 has had a rough six months makes this even more appealing. Since January, it has dropped by more than 20%, making it the worst six-month start to a year since 1970.
Since November, when the annual interest rate on I bonds went up to 7.12%, 1.85 million new savings bond accounts have been opened.
Byrke Sestok, who is a certified financial planner and co-owner of Rightirement Wealth Partners in Harrison, New York, said that I bonds are a great way to save money and invest.
I bonds won’t lose money because the U.S. government backs them. He also said that the current rate “dwarfs” other ways to save money if you don’t need to use the money for a year.
Still, you should think about a few things before putting a lot of money into these assets. Here are the answers to some of the more complicated I bond questions.
1. How do I bonds’ interest rates work?
I bonds have a fixed rate and a variable rate that changes every six months based on the consumer price index. The U.S. Department of the Treasury says that there will be new rates on the first business day of May and November every year.
Since inflation has gone up over the past year, so have the variable rates. The annual rate was 7.12 percent in November and 9.62 percent in May. But when you bought the bond affects the first six-month rate window.
For example, if you bought I bonds on July 1, you will get 9.62 percent interest every year until December 31, 2022. After that, you’ll start getting paid the annual rate you were told about in November.
2. How do I pay taxes on the interest I get from my I bonds?
Even though you don’t have to pay state or local taxes on the interest from an I bond, you still have to pay federal taxes.
There are two ways to pay the bill: either put the interest on your tax return every year or wait until you cash in the I bond.
Most people wait, but Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, said that the choice depends on a few things.
For example, if you choose to pay taxes on your I bond interest every year before you get the money, you’ll need another source of income to cover those levies.
He said that it doesn’t make sense to pay levies every year if you’ve saved those funds to pay for school because the interest isn’t taxed.
Lucas said, “All of these decisions come back to what this investment is for in the end.”
3. What will happen to my I bonds if I die?
When you open a TreasuryDirect account to buy I bonds, you have to add a “beneficiary designation” that says who will get the money if you die.
Without this designation, it will be harder for family members to get I bonds, and depending on how much they are worth, they may have to go through probate court and spend time and money doing so.
“I make sure my clients do it right the first time,” he said, explaining that adding beneficiaries at the beginning could save trouble down the road.
But if you set up an account without a beneficiary, you can add one by going to TreasuryDirect and following the steps. You can call support if you have questions, but the website says that they are getting “more calls than usual” right now.
If a beneficiary is named, Treasury Direct says that I bond heirs can keep the asset, cash it in, or have it reissued in their name.
The interest that has accumulated up to the date of death can be added to the final tax return of the person who owned the property or to the return of the person who will inherit it. Lucas said that the person who will get the money can decide whether or not to keep deferring interest.
