Terry’s Columns I-Bonds: Everything You Must Know

I-Bonds: Everything You Must Know

By Terry Savage on November 02, 2022

Updated 04/29/23
The new rate for Series I bonds purchased after May 1, 2023 is 4.30%. That includes a new higher base rate of 0.90%, which will stay with the bond for its entire lifetime. Future inflation adjustments will be made on top of that 0.90% fixed base rate. The current inflation adjusted portion of new I-bonds is 3.38%.

If you purchased bonds before the end of April, you will get the 6.89% rate for a full six months. Then this new inflation adjustment of 3.38% on your old base rate of 0.40%. So your total return applied to those bonds for that next 6 months will be slightly under 3.8%.

Remember, (see below) you must hold I-bonds for at least one year, and will be penalized 3 month’s loss of interest if you cash them in before 5 years. So while I bonds still make a great gift, and an inflation-matching long-term investment, they may not be as appropriate as T-bills (described in this nearby article).

As of this writing, 26-week (6 month) T-bills are yielding 5%. They may go higher at the next weekly auction as the Fed continues to push short-term rates higher. They are purchased in the same TreasuryDirect.gov account you used to purchase your I-bonds.

Here’s what you need to know about buying Series I bonds:
• The only place to buy savings bonds now is through the online government website – www.TreasuryDirect.gov – where it’s easy to set up an account and make your purchase with money taken directly from your bank account. You will need your bank routing and account numbers. You’ll see your purchase in your account the next business day.

• You can open an account in your name, using your SS number. Spouses must each open a separate account, even if the money is coming out of a joint bank account. You can open an account in the name of your revocable living trust. And you can still buy “gift bonds” (see below). But you cannot purchase savings bonds in an IRA.

• There is a $10,000 per person per year limit for purchases of savings bonds. (You can also buy an additional $5,000 per year in bonds using your tax refund. But the request must be made at the time you file your taxes.) Minimum purchase is $25.

• The purchase limitation is based on the Social Security number. So, each spouse, for example, could purchase $10,000 of bonds. There is one exception: if you also have a revocable living trust that uses your SS number, it can also buy $10,000 worth of bonds in one year, in addition to the $10,000 purchase in your own name.

• Bonds can also be registered for two people, using the designation “with” or “POD” (payable on death). Only the primary name and SS number counts toward the $10,000 annual limit.

How interest on savings bonds is paid and taxed:
• You must hold the savings bonds for at least one year. If you sell before holding for 5 years, you’ll lose the last 3 months of earned interest.

• You won’t see interest posted in your TreasuryDirect account until the 5th month after purchase. That reflects the potential 3 months’ loss of interest, as well as the fact that interest isn’t paid until the month after it accrues. But you do get 6 full months of interest at the promised rate credited eventually.

• As noted above, you’ll earn the stated rate of interest for 6 months – no matter when during the period you buy them. Then the rate will automatically adjust to the then-current rate for the next full 6 months.

• You pay Federal (not state) tax on savings bonds when they are cashed in – or when you change ownership of existing bonds.

• If you need access to cash, you can redeem only a portion of your bonds, paying taxes and any penalties.

The rules for gifting bonds have been adjusted for these digital bonds.
• You can still gift bonds using the SS number of the recipient if they have a TreasuryDirect account. But you can also gift using their SS number but keeping the bonds in your own account, to be distributed at some time in the future at your choice or after your death.
If you want to give Savings Bonds as a gift, here is a step-by-step guide from TreasuryDirect:
https://treasurydirect.gov/files/savings-bonds/how-to-buy-gifts-in-td.pdf

Would you rather watch a demonstration video of how it’s done? Here are two links.
To understand how to purchase gift bonds, watch this helpful 2 minute video from TreasuryDirect:
https://treasurydirect.gov/indiv/tools-videos/purchase-gift-bonds/
To understand how to “distribute” a gift bond later (perhaps as a college graduation present), watch this TreasuryDirect short video: https://treasurydirect.gov/indiv/tools-videos/deliver-gift-savings-bonds/

• Or you can create a “minor-linked” parental account which gives the child full control at age 18 (and may impact college financial aid).

• Ownership of bonds at death depends on how you have titled the bonds. If there is a POD or “with” designation, the other named owner can keep the bonds and keep earning interest on them. Or they will be distributed by a trustee or will executor. But there is no “step-up” in cost basis for the bonds at death, so the estate or recipient is responsible for taxes on all accrued interest.

Series I bonds are the ultimate “chicken money” investment — safe, higher interest rates that keep up with inflation, albeit with a holding period. And that’s The Savage Truth

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