I Bonds a High Percentage Rate and Little Risk

I Bonds are the perfect gift for grandparents who want to help their grandchildren further their education or retirees who want to earn a high-interest rate with little risk. Right now, you can’t go an hour without hearing about I Bonds from a financial advisor, and the word is spreading to the general public.

I Bonds are Treasury bonds that pay an interest rate that incorporates an inflation factor. Currently, they are paying over 9.62% interest due to high inflation. That’s pretty good compared to just about anything, especially your online savings account or other bond funds. As treasury bonds are backed by the federal government, they are considered risk-free investments, and there is a guarantee on your principal and interest.

A bonus: I Bonds can be used to pay for college, with interest earned tax-free if used on higher education expenses such as tuition and fees, books, supplies, room, and board. Income eligibility phases out at MAGI of $123,550 for married filers and $82,350 for all others. In addition, I Bonds can be used for almost anything; if they aren’t used for qualified higher education expenses, interest is taxed only at the federal level, not at the state level.

Investing in I Bonds isn’t a slam-dunk; like any instrument receiving preferential tax treatment, there are some restrictions.

  • The I Bond must be held for at least one year. Redeeming it (cashing it in) within five years will forfeit the last three months’ interest.
  • Every April and October, I Bond interest rates reset every six months. Therefore, the current 9.62% rate is only guaranteed until October 2022. For reference, the interest rate last year, Oct. 31, 2021, was 3.56%.
  • I Bond purchases are limited to $10,000 per Social Security number per calendar year. In other words, you could purchase $10,000 now, $10,000 in January, and then no more until 2024. It is also possible for spouses to do so. Note if you elect to do paper bonds (instead of the electronic version), the limit is $5,000 per calendar year.
  • Additional I Bonds can be purchased in your child’s name, but QHEE distributions are not tax-free for I Bonds issued in the parent’s name.
  • The accrued interest on the Bond will be taxable if your income exceeds the limit for interest deductibility. It is possible, however, to roll I Bonds tax-free into your 529 accounts if your income remains below the threshold. The tax-free treatment will continue as a result.
  • I Bonds have a minimum purchase amount of $25 electronically and $50 if issued on paper.

Evan if your income exceeds the limit for tax-free bonds, I Bonds can be a great investment choice. Many people use them as a general savings vehicle as appropriate, noting the restrictions on use in the first year. In addition, parents looking for a way to save for non-qualified education costs, such as transportation, personal expenses, etc., might find these to be a great complement to their 529 plan even without tax benefits. Redeeming them generates taxable income: all interest accrues in the account and becomes taxable income after redemption. Treasury Direct offers I Bonds for sale online.