What to know before you invest

Okay, technically these are Series I Savings Bonds. I suspect that if Apple had created them, they would have cleverly named them iBonds. Over the past couple of months, you may have seen articles about them because the Treasury recently declared their interest rate of 9.62% through this October. That’ll get your attention. 

In 1999 the Treasury created a new type of security, Treasury Inflation Protection Securities (TIPS). Series I Savings Bonds are a mini version of TIPS. These instruments are like Treasury Notes, except they behave in the opposite manner. They generally go up during periods of rising interest rates. Regular bonds normally decline in value during interest rate increases.

Things to consider before investing

In today’s investment environment, what could go wrong? While they are an interesting investment, here are a few things to consider:

• Each taxpayer can invest up to $10,000 per year. You can bump that by $5,000 if you use your tax refund to buy iBonds. So, if you’ve got $200,000 sitting in a money market account earning 0.4%, this won’t make much of a dent. But keep in mind, you’ll earn $962 per year on your $10,000 (if they don’t change the rate in October). That’s the same amount of interest you would earn at 0.4% on $240,500!
• While you can withdraw funds after one year, if you don’t leave your funds invested for at least five years, you forfeit three months of interest.
• You can choose to defer taxation on these bonds until they mature in thirty years or if you cash out earlier. The unwelcome news is that by deferring taxation you are piling up taxable interest which could push you into a higher tax bracket.
• You purchase these instruments by opening a Treasury Direct account through the Treasury’s website. You can start by clicking on their Guided Tour Individual-Account. If you’re married, you and your spouse would open individual Treasury Direct accounts with your respective Social Security Numbers. That allows a couple to purchase $20,000. You can’t open a joint account. These are a bit clunkier than a savings account or money market account, but the interest rate is much higher.
• Keep in mind that the $10,000 limit is for each calendar year. Over a ten-year period, you could have invested $100,000! If your savings reserve is primarily for a rainy day, it makes sense to shift funds from checking/savings to iBonds over time so that your “locked up” reserve is earning substantially more than the alternatives.

Here’s my take

If you’ve got way more cash then you need sitting in your checking, savings and/or money market accounts, you really can’t go wrong putting $10,000 to $15,000 per year into iBonds. Once the funds have been sitting there for five years, they are fully liquid with no penalty, and they are fully guaranteed by the US Treasury. My caveat: pay the tax on the interest annually – it will only get worse!

If you have questions, call your advisor. All you must do is ask Gari to send you a link for a “Touch Base” Zoom Call.

Rick Adkins, CFP®, ChFC, MBA

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