On May 2, 2022, the interest rate for Series I savings bonds will reset. Combine this with recent high inflation rates, and many people may be thinking about purchasing I bonds.
Below are a few pros and cons to consider before making a decision.
Pro: Tax benefits
The first pro is the potential tax benefits when the bonds are used for higher education.1 The bond owner can exclude from their gross income all or part of the interest paid upon redeeming the bonds when they pay qualified higher education expenses.
Pro: Interest rates
The second pro is the current interest rates (particularly compared with current money market rates). Series I bond interest rates are based on a fixed rate, plus an interest rate that varies based on the semiannual inflation rate and is set twice a year. The TreasuryDirect website provides more details on how the interest rate is calculated.2
Currently the Series I bond fixed rate is 0%, meaning the entire rate will be based on the inflation portion. Given the high inflation measures we’ve been experiencing, the current overall rate is high (which is what has been prompting all the recent interest in these investments). Going back to 1998, this past semi-annual interest rate was the largest ever provided (see the bottom of the rate chart here).3 Right now, the initial interest rate on new Series I savings bonds is 7.12%. It is expected to rise to 9.62% on May 2.
Con: The variable inflation rate
Given the variable nature of the inflation rate, the risk over a longer time period is that the inflation rate declines. On the plus side, the interest rate would never fall below 0% for these savings bonds.
Con: The yearly purchase limitation
Another con of the Series I bond is the yearly purchase limitation (which can make it more difficult to manage operationally) and relatively small investment amount. Individuals can invest $10,000 per year into Series I bonds, plus an additional $5,000 from an individual’s tax refund.
While there are some strategies to increase that amount (e.g., buying $10,000 at the end of this year, then $10,000 next year; having each family member purchase bonds), this can be a limiting factor for those with larger short-term savings balances and be a pain point for investors operationally.
Con: Timeframe
The last cons of buying Series I bonds include the one-year lockup period before bonds can be redeemed and the five-year holding period before the bonds can be redeemed without a three-month interest rate penalty.
Series I savings bonds have a total lifespan of 30 years. The bonds must be held for a minimum of one year. After one year, the bond can be redeemed before maturity but will be penalized three months’ interest if redeemed in the first five years. Investors with a short-term timeframe should be aware of the minimum one-year holding period and interest rate penalty if redeemed within five years.
Looking to buy Series I savings bonds?
If you’re interested in learning more about Series I savings bonds and whether they would be a good option for you, reach out to Wipfli Financial for assistance.
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