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U.S. Treasury Series I Bonds – Updated Rate at 9.6% Effective May 2022
- April 26, 2022
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Article updated April 2022
Fixed income plays a vitally important role in investor portfolios, the main purpose being to diversify and be a shock-absorber against deep drawdowns in the stock market. However, due to stubbornly low interest rates, fixed income is currently not an investment where meaningful returns should be expected. Furthermore, actual inflation has spiked in the U.S. economy, causing fixed income investments to earn negative real yields. Against this backdrop is a surge in the popularity of U.S. Treasury Series I Bonds.
What are U.S. Treasury Series I Bonds?
Before we explore the usefulness of I Bonds in a portfolio, we must first understand what these securities are and how they work. Here is a rundown of I Bond characteristics:
- I Bonds are issued by the U.S. Treasury and purchased directly at https://www.treasurydirect.gov/. Note that I Bonds purchased with a tax refund are issued in paper form.
- I Bonds have a 30-year maturity with semi-annual interest compounding.
- I Bonds pay interest income, which is taxed at the federal level but is exempt from state level income tax.
- I Bonds have some liquidity restrictions, as described below.
- I Bonds have a unique combination interest rate structure, as described below.
The interest rate on I Bonds is a combination of a fixed rate and an inflation rate that together make up a composite rate. The fixed rate does not change during the life of the bond. The inflation rate adjusts semi-annually based on the Consumer Price Index for all Urban Consumers (CPI-U), causing this component of the rate to vary through the life of the bond. The rate most recently established in May 2022 will reset again in November 2022.
Why are I Bonds so Popular Now?
Effective May 2022, new I Bond issues will earn a 9.60% annualized interest rate. As we mentioned, the interest rate is a composite rate. The current fixed rate is actually 0%, but the current inflation rate is 9.60%, for a combination rate of 9.60%, making this type of bond extremely attractive. The inflation rate will adjust again in November. It should be noted that this rate is the highest since May 2000.
What are the limitations of I Bonds?
The main restriction with I Bonds is that investors are limited to $10,000 annual purchases. This amount can be increased by an additional $5,000 if purchased with a federal income tax refund. I Bonds must be owned for one year before they can be cashed, and if you sell them before a five-year holding period, then there is a forfeiture of three months of interest. After five years, I Bonds can be redeemed at current value. I Bonds must be purchased directly from the U.S. Treasury and cannot be owned in a Roth IRA.
Main Takeaways
Fixed income investments remain an essential part of an investment portfolio, but current low rates and high inflation present a challenge. Compared to conventional fixed income, I Bonds have a lot of appeal, and for good reason, making them an excellent investment idea. However, purchase restrictions don’t allow for them to be a meaningful portion of larger portfolios. In a low interest rate and high inflationary environment, I Bonds can be quite helpful in an attempt to boost returns from fixed income. Because they are government issued, they fit nicely into the safe corner of an investment plan. For more information about I Bonds, please contact our team.
This is based upon publicly available information and is provided for general information and educational purposes only. The information contained herein has been compiled from data considered to be reliable. The information in these materials, including interest rates may change at any time and without notice.
This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.
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About The Author
Doug Mathey
Doug Mathey, CPA/PFS, MT, has more than 30 years of tax and financial experience working with business managers, corporate executives, retirees and high-net-worth individuals and their families.He focuses on all areas of private and business wealth management, including tax consulting, planning, investment strategy, compliance and financial and estate planning. He also has in-depth experience with business succession plans and mergers and acquisitions.
I am an expert and enthusiast-based assistant. I have access to a wide range of information and can provide insights and assistance on various topics. I can help answer questions, provide explanations, and engage in detailed discussions. If you have any questions or need information, feel free to ask!
Now, let's discuss the concepts mentioned in the article about U.S. Treasury Series I Bonds.
U.S. Treasury Series I Bonds
U.S. Treasury Series I Bonds are a type of investment security issued by the U.S. Treasury. These bonds can be purchased directly from the U.S. Treasury website at . It's important to note that I Bonds purchased with a tax refund are issued in paper form.
Characteristics of I Bonds
Here are some key characteristics of U.S. Treasury Series I Bonds:
- Maturity: I Bonds have a 30-year maturity period.
- Interest Compounding: Interest on I Bonds compounds semi-annually.
- Taxation: The interest income earned from I Bonds is taxed at the federal level but is exempt from state level income tax.
- Liquidity Restrictions: I Bonds have some liquidity restrictions. They must be owned for at least one year before they can be cashed. If they are sold before a five-year holding period, there is a forfeiture of three months of interest. After five years, I Bonds can be redeemed at their current value.
- Interest Rate Structure: The interest rate on I Bonds is a combination of a fixed rate and an inflation rate. The fixed rate remains constant throughout the life of the bond, while the inflation rate adjusts semi-annually based on the Consumer Price Index for all Urban Consumers (CPI-U). The most recent interest rate was established in May 2022 and will reset again in November 2022.
Popularity and Limitations of I Bonds
U.S. Treasury Series I Bonds have gained popularity due to their attractive interest rates. Effective May 2022, new I Bond issues earn a 9.60% annualized interest rate, which is a combination of the fixed rate and the inflation rate. This is the highest rate since May 2000.
However, there are limitations to consider when investing in I Bonds. The main restriction is that investors are limited to $10,000 in annual purchases. This amount can be increased by an additional $5,000 if the bonds are purchased with a federal income tax refund. Additionally, I Bonds must be owned for at least one year before they can be cashed. If they are sold before the five-year holding period, there is a forfeiture of three months of interest.
Despite these limitations, I Bonds can be a valuable addition to an investment portfolio, especially in a low-interest-rate and high-inflationary environment. They offer the benefit of being government-issued and can provide a boost to returns from fixed income investments.
Please note that the information provided is based on publicly available sources and is for general information and educational purposes only. It's always a good idea to consult with a qualified professional advisor before making any investment decisions.
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