How, When, and Why to Buy I Bonds: 7.12% in April or 9.62% in May?

Why would anyone want to buy I Bonds? Does a guaranteed interest rate of 7.12% do anything for you? How about 9.62%? Buy now, and you’ll get both rates, as you’ll learn below.

While you may not be a huge fan of the issuer — that would be the U.S. Treasury, a department of the U.S. government — you’re not going to find many safer fixed-income sources. After all, the Treasury has the power to create money.

How do you buy these I Bonds? It’s not as simple as buying shares of BND or VBTLX from Vanguard, but it’s not terribly complicated, either.

Why You’re Suddenly Hearing About I Bonds

These bonds are not new, but they’re newly enticing. The interest rate is tied to one of the U.S. Government's measures of inflation, the CPI-U, and that’s been going nowhere but up in recent months.

For the same reason that Social Security benefits will receive a 5.9% boost as a cost-of-living adjustment for 2022, I Bonds are now paying more than they have in a long time.

For the formula and further details on how the interest rate is calculated, see the explanation at Treasury Direct.

In summary, it’s a combination of a fixed rate (currently 0%) and a variable rate, each of which is updated every six months in November and May. The fixed-rate has been under 1% since May of 2008 and has not been above 2% since 2001.

On the other hand, the variable rate has been as low as an annualized -5.56% during the Great Recession and has never been as high as it is now (7.12%) since I Bonds were first issued in 1998. That interest rate is expected to climb to 9.62% for those purchased in the six-month period from May to November of 2022.

Note that the interest for every I Bond ever issued is updated every six months. Every I Bond purchased in the first two, and a half years these were offered is now paying over 10% annualized for the next six months.

Understand that the interest rate for all I bonds will change in May of 2022 and every six months thereafter based on the inflation rate of the previous six months. This rate is calculated for the six months, including March and September, with the numbers released in April and October.

For a detailed look at the interest rates and how they’ve changed for I bonds issued since 1998, please see this chart from Treasury Direct. Plan on zooming in on the table to read it; it’s a big one.

Another useful resource for looking at the past performance of I Bonds purchased in the past can be found here at eyebonds.info.

Buy in April or Wait Until May?

You have an interesting conundrum if you have yet to make an I Bond purchase in 2022.

If you complete your purchase before the end of April, you are guaranteed 7.12% for the first six months, at which point the interest rate will reset to 9.62% for the next six months.

In this case, $10,000 becomes $10,356 after six months of 7.12% interest and grows another 4.81% (half of 9.62%) to become $10,854 after a full year for an 8.54% blended annual interest rate.

If you wait to buy until May, you’ll get 9.62% for the first six months and then an unknown interest rate for the following six months. That rate depends upon the inflation rate, as measured by CPI-U, between March and September of 2022.

If semi-annual inflation rises by 3.6% or more between March and September, you’ll get 7.2% or higher interest on your I Bonds in the subsequent six months, and you’ll come out ahead for waiting as opposed to buying in April. If inflation cools off over the summer, you’ll see a lower interest rate when it resets again in November, and you would have been better off buying I Bonds in April.

Your guess is as good as mine as to which way inflation will go. My November ’21 and January ’22 purchases will be upgraded to the 9.62% rates in April and June, and I’m quite happy with an 8.54% return over 12 months. I like taking the sure thing, but if you’re convinced inflation will not temper by fall, you could hold off a few weeks to make your first I Bond purchase.

Consider opening a Treasury Direct account if you don’t have one yet. Some people have been asked to verify their identity, which can be a time-consuming process involving a Medallion Signature Guarantee, similar to getting a signature notarized. It must be done in person with someone qualified to verify your identity.

Advantages of I Bonds

Tax Treatment

Interest in I Bonds is credited twice a year, but you do not pay taxes on that interest until you decide to cash out your bond. It is automatically reinvested.

This is effectively a form of tax deferral, different from most bonds and bond funds.

Additionally, when you redeem your I Bonds, the interest will not be subject to state or local income taxes. A downside is that bond interest is subject to ordinary income tax rates at the federal level, which is true of most bonds, except lower-interest municipal bonds.

Furthermore, if you have a modest income when your children are in college, you can redeem your I Bonds completely tax-free when you use the proceeds to cover qualified education expenses. The same is true of Series EE Bonds purchased after 1989. This interest exclusion phases out at a (MAGI) between $85,800 and $100,800 for single filers and between $128,650 and $158,650 for those married filing jointly. If you’re married and filing separately, there is no interest exclusion. Funding a 529 account is a qualified education expense.

The Interest Rate!

“High Yield” savings accounts pay about 0.5% interest in 2021. Money market funds and typical savings accounts pay even less.

Vanguard’s Total Bond Fund yields 1.5%, and the value of the underlying fund is subject to change, unlike the value of an I Bond, which can never drop (or rise) in value.

A 7.12% or 9.62% return is perfect for a fixed income. Act before the end of April, and you’ll get 8.54% over the next year.

Low Default Risk

Sure, Congress will play games and kick the can down the road, but the odds of our government actually defaulting on debts owed to investors is exceptionally low.

There was a brief default in 1979, but Treasury bill holders got their interest after a brief delay. If the U.S. government truly defaults and can never pay its debts, we’ve got bigger problems than not receiving interest payments on a portion of our bond allocation that year.

Disadvantages of I Bonds

Annual Purchase Limits

You’re limited to $10,000 per person in online purchases, and you can buy an additional $5,000 in paper I Bonds via your federal tax refund if you paid more than you owed.

If you’re married, your spouse can do the same, you can make purchases in your kids’ names, and trusts can own them.

I’m not going to go out of my way by forming a trust or giving the government an interest-free loan by paying more than necessary towards next year’s tax bill, so I’ll settle for $10,000 a year for me and $10,000 a year for my wife. You could do this twice in succession at the end and beginning of a calendar year, as we did at the end of 2021 and the beginning of 2022.

Only One Seller

You can’t buy these from your favorite brokerage, and there’s no I Bond mutual fund or ETF. That also means that there are no fees, so this is an advantage in some ways.

It does mean that you have to create an account at Treasury Direct, so that’s a bit more to keep track of.

Illiquidity for One Year

You cannot redeem I bonds until you’ve owned them for a full year. If you choose to cash them in before five years have passed, you’ll forfeit three months of interest payments.

This 3-month interest forfeiture is actually assumed and baked into the balance shown on your I Bonds, and they’ll credit you the missing interest in your account once you hit the 5-year mark.

Compare this to a more typical 6-12 month penalty for early withdrawals from certificates of deposit, and it doesn’t look so bad.

Learn How to Buy I Bonds from Treasury Direct

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This article was produced by Physician on Fire and syndicated by Wealth of Geeks.

Featured Image Credit: Wealth of Geeks.


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Leif Dahleen retired from medicine at the age of 43 in 2019, having achieved financial independence several years earlier. He started Physician on FIRE to enlighten, educate, and entertain other high-income professionals while discussing money matters of all sorts.

He is happily married with two children. They call northern Michigan their home base and, until quite recently, spent much of the year traveling as a family.