5 Reasons to Consider Series I Savings Bonds Now: Jeff Levine

There aren’t many positives when it comes to the increased inflation we are experiencing, but the high inflationary environment has made Federal Series I Savings Bonds “significantly more attractive for investors,” according to Jeffrey Levine, chief planning officer at Buckingham Wealth Partners and lead financial planning nerd at Kitces.com.

Fixed income investments represent an “important component in a portfolio because of their ability to cushion against equity market losses,” he pointed out in a Dec. 8 blog post on Kitces.com. But fixed income holdings have “not had much luck during the low-interest-rate environment of the past few years,” he said.

That, however, has changed now amid increased inflation. I bonds are offered via the Treasury Department and are backed by the U.S. government. They can be bought through the TreasuryDirect website. Such purchases are limited to $10,000 each year per person.

What makes I bonds unique is their interest structure, which is made up of a combined fixed rate and inflation rate that, together, make a composite rate, which Levine noted is the actual rate of interest that an I bond will earn over six months.

But because I bonds are “completely illiquid for the one-year period following their purchase (unless a Federally-declared disaster happens), they “would clearly not be an appropriate investment option for anyone who may need access to such funds during that time,” he warned.

See the gallery above for five good reasons why advisors and their clients ought to consider I bonds right now — and, by right now, Levine means before Jan. 1.

1. The current composite rate of 7.12% on I bonds is "very favorable."

Although the current fixed rate for newly purchased I bonds is 0%, the inflation rate for I bonds bought before May 1, 2022 is an annualized 7.12%. That means the composite rate is also an annualized 7.12% (the “highest rate” of I bonds since May 2000) for the first six months the I bond is held, Levine noted. After that, a new composite rate will be determined by any change to the inflation rate, he said.

I bonds have a 30-year maturity, but they can be redeemed after being held for at least 12 months, he said. Investors who redeem I bonds between 12 months and five years after issue will forfeit the last three months of interest, but I bonds held for over five years can be redeemed at their current value, he added.

(Image: Adobe Stock)

2. There are ways for investors to maximize the amount bought at the current favorable composite rate.

There is a $10,000 annual limit on I bond purchases that restricts their benefit for investors with larger portfolios, Levine said. But “there are several ways investors could increase the amount purchased at the current (very favorable)” composite rate,” he said.

As an example, he noted that, because the annual limit is a calendar-year limit, individuals could buy $10,000 worth of I bonds before Jan. 1, 2022, and then an additional $10,000 between Jan. 1 and April 30. That means a couple could buy a combined $40,000 worth of I bonds and receive the annualized 7.12% composite rate for the first six months the bond is held.

I bonds can also be bought for kids or by trusts and estates, which could further increase the amount investors can purchase, he said.

Last, paper I bonds can be bought using a tax refund up to a $5,000-per-return limit, he said, noting that is “in addition to the $10,000 annual limit” on I bonds purchased via the TreasuryDirect website.

(Photo: Susana Gonzalez/Bloomberg)

3. If purchased quickly, they can increase the yield for part of an investor’s fixed income portfolio.

There is a limited amount of time for investors to buy I bonds at their highly favorable 7.12% composite rate, “especially if they want to maximize the amount purchased for the 2021 and 2022 calendar years,” Levine said.

“In the current environment of low interest rates and high inflation, I Bonds represent a potential opportunity for investors to increase the yield for a portion of their fixed income portfolio!” he added.

(Image: Shutterstock)

4. I bonds are less risky than other investments.

Because I bonds are offered through the U.S. Department of the Treasury, they are “backed by the full faith and credit of the U.S. government, which is essentially the gold standard of guarantees when it comes to fixed income investments,” Levine said.

“When the I Bond’s current 7.12% yield is compared to other, comparably ‘safe’ options, it becomes easy to see just how good of a deal I Bonds are in the current environment!” he added.

The 7.12% annualized composite rate will apply for the first six months of all I bonds bought from November 2021 through April 2022, he said, adding: “Upon the I Bond’s six-month anniversary, the new Composite Rate will be applied.”

(Image: Shutterstock)

5. Tax refunds can be used to buy additional paper I bonds.

The $10,000 limit on annual I bond purchases per person applies only to I bonds purchased in electronic form. Investors can direct up to $5,000 of their income tax refund toward the purchase of paper I bonds, Levine noted.

To do that, investors have to file Form 8888, Allocation of Refund (Including Savings Bond Purchases), and complete Part II of the form, U.S. Series I Savings Bond Purchases.

(Image: Shutterstock)

5 Reasons to Consider Series I Savings Bonds Now: Jeff Levine

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1. The current composite rate of 7.12% on I bonds is "very favorable."

2. There are ways for investors to maximize the amount bought at the current favorable composite rate.

3. If purchased quickly, they can increase the yield for part of an investor’s fixed income portfolio.

4. I bonds are less risky than other investments.

5. Tax refunds can be used to buy additional paper I bonds.

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5 Reasons to Consider Series I Savings Bonds Now: Jeff Levine

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1. The current composite rate of 7.12% on I bonds is "very favorable."

2. There are ways for investors to maximize the amount bought at the current favorable composite rate.

3. If purchased quickly, they can increase the yield for part of an investor’s fixed income portfolio.

4. I bonds are less risky than other investments.

5. Tax refunds can be used to buy additional paper I bonds.

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