Personal Finance

Series I Savings Bonds Earn 7.12% – It’s Worth Consideration

Savings Bonds Earning 7.12%

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Looking to earn a bit more on your cash but not ready to invest it? Or have cash set aside for a specific financial goal or purpose in the next few years and wish you could be earning more than 0.06% in a savings account at the bank? There may be a good alternative out there for you. Series I Savings Bonds.

Series I Treasury Savings Bonds

It was announced by the Treasury on November 1, 2021 that the new composite interest rate on Series I Savings Bonds would be 7.12% over the next 6 months – November to April. It will then be reassessed and reset come May 1, 2022.

Why have you not heard about this?

Treasury savings bonds fly under the radar a bit because they are sold directly by the US Treasury. They are not sold by financial institutions and thus are not marketed heavily to the public because there is no financial incentive and your financial advisors aren’t able to assist you in the purchase.

I’ve heard of the Series I bonds before and their relationship to the inflation rate, but never gave them much thought. They frankly have never been as attractive of an option to me as they are right now.

Given the interest rate environment we are in, I reviewed this option more closely and felt it had a bit of a “too good to be true” cloud over it. So I called the source, Treasury Direct, to find out more and clearly identify the terms. It is good, and it holds true.

Here are the Facts I Want You to Know

How much can I invest?

You are able to purchase…

  • Up to $10,000 in electronic I Savings Bonds per person, per year
  • Up to $5,000 in paper I Savings Bonds per person, per year

In addition, you are able to use your tax refund as a means to purchase up to $5,000 of a Series I Savings Bond in paper. So you could effectively invest $10,000 in electronic form, and an additional $5,000 in paper form when you file your tax return using Form 8888 to allocate your refund to purchase the bonds.

How long do I need to hold the bond for?

Series I Bonds earn interest for 30 years unless they are cashed out and redeemed first.

  • You are required to hold the savings bond for a minimum of 12 months.
  • If you redeem the bond within the first 5 years, at redemption, you will forfeit the last 3 months of interest as a “penalty”. So for example, if you redeem a savings bond after 18 months, you would receive 15 months worth of interest.
  • If you redeem the bond after 5 years, there are no penalties or forfeiture of interest.

What is the risk?

These savings bonds are backed by the US Government and are not subject to market risk. Meaning that, according to the Treasury, it is promised that you receive your principal and interest earned at the time you redeem your bond. You may redeem the bond at your discretion, so long as it is after 12 months.

The way I see it, is that the only risk you take on is the risk that inflation decreases and the interest you earn will decrease over time as a result.

How am I taxed?

You will not be required to report the interest earned on the Treasury savings bond until you redeem it.

The interest earned on these bonds are taxed at the Federal level – but state and local income tax FREE.

You may be able to exclude federal income tax on the interest earned if used to pay for qualified higher education expenses. Refer to IRS Form 8815 to learn more about this exclusion.

How Do the Savings Bonds Work?

There are two components to the Series I Savings Bonds that impact the stated composite interest rate:

  1. Fixed rate – which is fixed for the life of the bond and currently at a whopping 0%.
  2. Inflation rate – which is variable and will reset every 6 months over the course of the life of the bond. Right now, this rate is 7.12%.

So together, the composite rate for Series I Savings Bonds in December 2021 is 7.12% and will be until April 2022.

Interest is earned on a monthly basis and is compounded semi-annually. Meaning that every 6 months, the interest your bond earned over the past 6 months, will then be added to the principal value of the bond.

When you redeem the bonds, the principal and interest earned will be paid directly to you.

Why I Think These Savings Bonds are an Attractive Option Right Now

So hear me out…

If you were to have purchased this bond on December 1, 2021 at 7.12% and then the inflation rate plummeted and the new composite rate for May 1 and November 1, 2022 went to 0.50% (which is unlikely) you would still have benefited by moving your cash from your savings account earning nothing, to this short term cash alternative.

From December 1, 2021 to December 1, 2022 you have $10,000 of cash in a…

  • Savings account earning 0.06% – You will earn $6
  • High yield savings account earning 0.50% – You will earn $50
  • Treasury Savings Bond earning 7.12% between December – April and 0.50% between May – November – You will earn $313.71.

Look at The Numbers In an Example

  1. You purchase $10,000 worth of Series I Savings Bond on December 1, 2021 at a current rate of 7.12%. You have 5 months worth of earning that stated 7.12% annual rate (or 0.593% monthly rate) before it hypothetically goes to 0.50% on May 1, 2022 and again on November 1, 2022.

  2. Over the course of December – April, you will have earned roughly $296.67 off of your $10,000 purchase.

  3. In May, the bond will now reflect the 0.50% annual interest rate (or 0.041% monthly). In May, you will earn $4.17.

  4. Interest is compounded semi-annually and thus your interest previously earned over the last 6 months will now be added to your principal. Your principal went from $10,000 to $10,300.

  5. Between June – November, you will have earned roughly $30.04.

  6. You have now held the bond for 12 months and you want to redeem it in December 2022. You will have to forfeit the last 3 months of interest. You will receive $313.71 off of your original $10,000 investment. That’s roughly 3.14% over the course of the year.

With the current interest “offerings” from banks, these inflation protected savings bonds are a wonderful opportunity to earn a bit more for your cash as a short term option. In this example, the rate went from 7.12% to 0.50% in a matter of 5 months (this is unlikely) and it was STILL a better option than keeping your money in your savings account.

Who Should Consider Looking Into These Bonds

For anyone who has cash that they are saving for a specific purpose over the next few years, or those of you who are not interested in investing more at this time, or are simply looking to earn more interest but not take on a lot of risk…These savings bonds are a great option.

Again, the maximum purchase is $10,000 for the electronic savings bonds per person, per year. You could purchase $10,000 in December, $10,000 on January 1, and $5,000 with your income tax refund in the spring and successfully set aside $25,000 of savings to earn a bit more interest than in your savings account.

If you purchase these savings bonds, it will be important to monitor the rates going forward. You will want to compare your interest rate offerings at the bank, CDs, high yield savings accounts and the composite rate for your savings bonds as that will change every 6 months. But again, as a short term option over the next 12 months at a minimum – it seems like no-brainer to me.

How Do You Buy Them?

By going to the Treasury Direct website and setting up an account to purchase the Series I Savings Bonds.

Or filing Form 8888 with your tax return to buy up to $5,000 of paper I Savings Bonds using your refund.

Hope you found this helpful!

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