It is time to buy I-bonds once more. Here are three methods to optimize your $10,000 investment to combat inflation. Currently, the rate is favorable, but if you wait until right before the next adjustment, it may be even better.
Another year, another $10,000 in Series I bonds can be purchased.
The once-obscure Treasury investment skyrocketed in popularity because of its alluring inflation-adjusted return, which peaked at 9.62% last year. This surpassed bank deposit accounts and negative stock and bond returns by a wide margin. The catch? Individuals are restricted to $10,000 each year, and those who reached the limit had to wait until the next year to get further funds.
Now that it is a new year, you may purchase more; the question is when you should. The current annualized offering at TreasuryDirect.gov is 6.89%, a combination of a 0.4% fixed rate that remains in effect for the duration of the bond and a half-year rate of 3.24% that is valid until April’s end. Note that you are trapped into I-bonds for one year, losing three months’ interest if you withdraw before five years.
This is above similar products that are still paying less than 5% at the start of the new year, such as high-yield savings accounts, certificates of deposit, Treasury bills, and notes, although not by quite the same margin as last year. The next rate change will occur on May 1, and the final set of data used to compute the inflation adjustment will be available in mid-April.
Why purchase I-bonds today
Your decision over when to purchase your next batch of I-bonds depends on your assessment of the U.S. economy. If you are positive that inflation will soon return to more typical levels of 2%, you may choose to purchase the whole amount and lock in the highest possible rate.
This is also the case if you do not intend to retain your I-bonds for a long time and intend to sell them once the one-year holding term expires.
Matthew Carbray, a financial advisor with Ridgeline Financial Partners in Avon, Connecticut, has been pushing clients to make the complete purchase because he believes the interest rate will be lower in May and the future. Between now and April, he does not anticipate a significant increase in inflation.
As soon as the new year began, he went all in for himself. “I want my money to earn as much as possible from day one,” he adds.
If you follow suit with $10,000, there are methods to purchase additional during the year, most notably through giving. You can purchase up to $10,000 on behalf of any individual if you have their Social Security number and email address. They may claim the gift in any year they have not yet surpassed their limit.
You may also get up to $5,000 in paper I-bonds as a tax return, which you may transfer to your digital account. This is something you should act on immediately. Thomas Gorczynski, a senior tax expert at his own Phoenix-based business, intends to pay extra on his final quarterly tax payment, with the refund coming in the form of I-bonds. You may simply overpay your fourth quarter anticipated tax payment by January 15 and then immediately submit your taxes for a refund; that way, he explains that you don’t let the government have your money for too long. Inflation-protected assets should be a part of any portfolio, even though they won’t make you rich.
Buy half now and save the other half until mid-April.
Gorczynski employs a half-and-half strategy for his 2024 primary I-bond allocation. He is depositing funds towards the end of January (to earn a full month of interest) not just for himself as an individual but also for various S Corp business companies he controls. Then, he will wait until the middle of April before deciding what to do with the remaining funds.
The crucial factor for him is whether it is likely that the fixed rate on I-bonds will climb in May, for which there is no public formula.
Consequently, he uses the real yield rates of TIPS as a proxy. If real TIPS returns have been high, he may wait and hope for a higher fixed rate. According to Gorczynsku, it is a guessing game, but if the 10-year TIPS is high, he believes there is a likelihood that the fixed rate would increase.
From a tax viewpoint, Gorczynski anticipates an influx of inquiries on managing I-bond profits, free from federal income tax until redemption (up to 30 years) and state and local taxes. He included a part on the taxation of inflation-adjusted investments in his tax professional education seminars.
Among the expert advice he offers: If an I-bond is redeemed in a year with eligible school costs, the redemption amount can be deducted from federal income, making it an intriguing alternative to the floundering 529 college savings schemes.
Hold everything till mid-April.
The I-bond rate you receive in January is the same as that in mid-April, so unless you need to move money immediately, you might simply wait and see.
David Enna, the proprietor of TipsWatch.com, a website that follows inflation-protected assets, states, by waiting, the only thing that occurs is that your one-year holding term does not begin to run.
Enna is awaiting the March inflation data, which is scheduled for release on April 12; she will then choose the optimal course of action. You could do half of your expenditure in April and the other half in May or move the entire amount into one of the months, whichever seems best. Inflation is only half of the formula, according to Enna. Thus it is necessary to include additional factors as well. The fixed-rate component is important over the long run. “I-bond investors want higher fixed interest rates,” explains Enna.
If economic signs indicate a decline in real yields, the Federal Reserve stops rising interest rates, and inflation moderates or falls, the argument for purchasing in April would be strengthened. Then you may expect that the rate in May will be lower than it is currently.
If real yields rise in May, it would appear that the fixed component would also increase. Then you would have an investment guaranteed to earn that amount annually at a rate above inflation, which is beneficial for capital preservation. The I-inflation-adjusted bond’s rate might increase if gas costs increase or another unknown trigger causes inflation to soar, and Enna says she recommends purchasing them annually.