Welcome to the Ready Set Retirement Blog, my name is Derrick Glencer I am a CERTIFIED FINANCIAL PLANNER™ Practitioner. The Ready, Set…Retirement Blog focuses on the financial planning questions and concerns of Gen X Execs and Soon to Be Retirees.

Over the past month the Wall Street Journal has had several articles about the I Bond. Today we are going to discuss what an I Bond is, how it’s taxed and if you should consider purchasing one.

So what is an I Bond? In short it is an inflation adjusted U.S. Savings bond. A Series I savings bond is a security that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.

How does Treasury figure the I bond interest rate?

As I said, the interest on I bonds is a combination of fixed rate and an inflation rate

The fixed rate of interest that you will get for your bond is set when you buy the bond and that fixed rate never changes.

Treasury announces the fixed rate for I bonds every six months (on the first business day in May and on the first business day in November). The fixed rate then applies to all I bonds issued during the next six months. The fixed rate is an annual rate and currently that’s 0%.

However, we also have the Inflation rate. The inflation rate can, and usually does, change every six months and that is currently 7.12% and is expected to go up to 9.6% in May.

The inflation rate is set every six months (on the first business day of May and on the first business day of November), based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.

The change is applied to your bond every six months from the bond's issue date.

Your rate will change every 6 months from the date of your purchase. For example, If you buy an I Bond in May you will have a rate change in November.

Something else you should know is that interest on I bonds are paid semi-annually. For example, if you purchase $10,000 you get paid your first interest payment (Based on the current rate of 9.62%) of $481. The $481 represent half of a years’ worth of interest at 9.62%. That amount is now added to your principal and your next payment will be calculated using the new interest rate, and the combined amount of $10,481.

What’s the catch.

For starters you can only buy $10,000 worth of I bonds and If you receive an income tax refund from the government, as opposed to getting that in cash you can get up to $5,000 in paper form.

Who can buy them?

You have to be either a United States citizen, whether you live in the U.S. or abroad or United States resident an in order to buy and own an electronic I bond you must first establish a TreasuryDirect account.

You can buy them for your children or your Trust, but certain limitations apply. Make sure you consult your tax preparer and CPA as to the tax impact regarding I bonds purchased for children. The interest portion for those accounts is likely to be your responsibility.

Speaking of taxes, How are they taxed?

Again, another check mark in the plus column for I bonds. The interest is exempt from state and local income tax, and you can defer federal income tax until you cash in your I bonds (or until they mature in 30 years). So that means if you elect to hold the bond to maturity you could have differed 100% of the interest payments on those bonds until. Consult your tax preparer or CPA when making a determination about when you recognize the interest.

I know what you are saying, there are no free lunches what’s the downside?

Well, there are a few. The largest being that it is possible while holding the bonds that inflation is actually negative. That means that the inflation rate would be deducted from the fixed rate and you could receive a negative return.

What I consider to be the most significant negative is that if you hold them for less than 5 years, you will forgo 3 months’ worth of interest.

Based on this who should buy them? 

I Bonds are most suitable for investors looking for long-term inflation protection. In the coming year, this might be a good option to place a portion of your emergency fund. 

For further information you should contact your financial adviser or tax preparer and for additional details head over to treasurydirect.gov for FAQ’s and how to set up an account.

Again, my name is Derrick Glencer I am a CERTIFIED FINANCIAL PLANNER™ Practitioner and this is the Ready, Set…Retirement Blog If you enjoyed this content you can book a complimentary consultation via Calendly at: https://calendly.com/djgcfp

Or directly through email at: derrick.glencer@raymondjames.com

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Thank you very much and go make it a great day!

The information covered in this podcast represents the views and opinions of the Derrick Glencer and his guests and does not necessarily represent the views or opinions of Raymond James. Raymond James is not affiliated with and does not endorse the opinions or services of any of the quoted professionals or their respective firms. Expressions of opinion are as of this date and are subject to change without notice. Any examples or case studies are for illustrative purposes only. Individual cases will vary. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

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