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How to Maximize the Power of Bonds in Today’s Environment

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September 29, 2022

The I Bond can be a great choice during inflationary periods to protect purchasing power

With inflation at an all-time high, the stock market on a roller coaster and interest rates on the rise, many investors are looking for somewhere to put their money that is as close to risk-free as possible with a decent return. You may be thinking this doesn’t exist right now. But there is an investment that is gaining ground during this unpredictable period and it’s the I Bond or Series I Savings Bond. With an interest rate that’s currently 9.62 percent, it is certainly appealing. While the limit is set at $10,000, there are some little-known creative ways you and your family can use to take advantage of purchasing more and earning that interest.

A deep dive on the I Bond

‍For starters, the I Bond is a government-issued bond that has an interest rate tied to inflation. When inflation is low, the I Bond rate is low, and when inflation is high, the I Bond interest rate is also high. The composite rate has two parts: a fixed rate, which is currently zero percent, and an inflation rate, which is based on the Consumer Price Index, which is currently at a 41-year high, and is 9.62 percent. Each May and November, the U.S. Treasury announces new fixed and inflation rates. Interest earned is added to the bond’s principal value.

Given its guarantee, you will receive your principal back when you sell. To add to the benefits, I Bonds are exempt on state and local income tax, and you also may defer federal tax until you file a tax return for the year, or you cash in the bond, or it matures. You also may report the interest each year if you’d like to avoid one federal tax bill down the road. Also, if you use I Bond proceeds to pay for certain expenses for yourself or your family, such as higher education, you may avoid the federal tax.

How to maximize your I Bond purchase

‍There is a $10,000 annual purchase limit per person, per year. If you’re married, you and your spouse may each purchase $10,000. You may also purchase up to $10,000 for each child and you may also purchase the same amount for entities like businesses and trusts. Those receiving large tax refunds from the IRS can use up to $5,000 to purchase additional I Bonds.

Now for the really good news. A strategy that is not well known can allow your family to invest and earn even more. There is a “gift box” feature with a $10,000 limit also, meaning that family members can each purchase $10,000 as a gift for a beneficiary. If the person listed as the beneficiary has already purchased their $10,000 of I Bonds in a calendar year, the bonds will go in the gift box held by the U.S. Treasury in their name. Beneficiaries can take out the funds in any future year as long as they do not exceed the annual purchasing limit of I Bonds. Funds will start earning interest the day they go into the gift box. Family members and trusts can purchase bonds as gifts.

The end of the year is just around the corner, and you may make a purchase of $10,000 this year and purchase again in 2023. I Bonds issued through October 2022 have a composite rate of 9.62 percent. So, you’ll want to act by Oct. 30, otherwise you’ll be subject to the new interest rate, which is based on inflation. Considering that bank CDs are at zero percent and money market accounts are offering a small fraction of a percent, this is not a bad deal.

We know market volatility can be scary, but you don’t have to go through it alone. Contact us today!

Wait, aren’t there drawbacks?

‍If this sounds like a great option for your money so far, there must be drawbacks, right? There are some terms to consider. You can’t redeem I Bonds in the first year. If you cash out within the first five years, you’ll give up three months of interest. Also, consider if an interest rate change every six months is something you can handle. If inflation continues to increase, great. However, there is always a chance that things could shift, although most likely shifts will not happen quickly. Plus, there is that limit to what you can purchase. Lastly, you must have a Social Security number to make a purchase.

Buying and selling I Bonds

‍It is always recommended to consult with your financial advisor and your accountant on your overall strategy. For more information, visit treasurydirect.gov and click open account, then navigate through the account opening process and select Series I Savings bonds. You’ll enter the amount you’d like to purchase, add your bank account to fund the purchase, and that’s about it. When you sell out, the government sends you a check for the original principal and collective sum of monthly interest earned over the time a bond was held. But don’t forget that selling out before the five-year mark will cost you three months of interest and you can’t sell in the first year.

If you have questions about how I Bonds may they fit into your financial plan, or if you would like your current financial plan reviewed, schedule an appointment on Bayntree’s online calendar by selecting the date and time that is most convenient for you! You can also always reach us by emailing info@bayntree.com. We are happy to help.

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Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

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