The financial crisis of the late 2000s may be an increasingly distant memory, but it has left a persistent legacy: stubbornly low interest rates for low-risk investment vehicles and few rewards. Rates on savings accounts, money market funds and government bonds remain at or below inflation. Of course, interest rates on mortgages aimed at the consumer market and car loans also remain historically low. Many economists believe that the American economy would not do so well without this tailwind.

What does this mean for people who want to plan to retire? The first half of 2010 was good for investors looking for risks, but not everyone can afford to invest their financial future for growth stocks. As you get older, lower-risk vehicles, such as savings bonds and dividend shares, must include an increasing portion of your portfolio; even if you are a spring chicken, it is wise to allocate part of your savings to these securities.

Series I savings bonds offer a unique opportunity for generally conservative savers who do not want to accept a sub-inflation return on their investments.

What are Series I savings?

What are Series I savings?

Series I savings certificates are treasury bonds, which means that they are among the safest investments there are. The Ministry of Finance describes them as ‘low-risk savings products’. Although it is not a completely safe investment, it is worth noting that the US government has never failed to fulfill its obligations to bondholders.

Unlike T-bills, Series I bonds do not come with frustratingly long terms or high minimum investment requirements. On the other hand, they do not offer the competitive return of many investment grade municipal bonds. As zero-coupon investments, Series I certificates do not interest in periodic payouts; instead, the interest that accrues to each security is added to the payout value. When you sell a Series I bond, you receive a one-off amount that includes the principal and all accrued interest.

Series I bonds are typically held for at least five years, but they can be cashed in earlier if you are willing to pay a small fine. Their interest rates are determined by combining a “fixed” and “inflation” rate to arrive at a “compound” interest rate. When you buy your bond, you lock your fixed interest rate – currently fixed at 0, 2% – for the entire duration, while your inflation changes every six months, in May and November. The current composite speed is set to 1, 38%.

Differences between EE and I Savings Bonds

The Series I bond is often compared to the Series EE savings bond, another non-traditional Treasury vehicle. Both are issued in much smaller tranches than traditional T-bills; you can buy I-bonds and EE-bonds for only $ 25. After the $ 25 threshold, both types of bonds can be purchased in steps of a single cent. I bonds and EE bonds both offer comparable tax breaks.

The most striking practical difference between EE savings certificates and I savings certificates concerns their interest rates. While the I-bond prices are calculated by adding a predetermined fixed interest rate to a variable inflation rate that is adjusted every six months in response to the Consumer Price Index for Urban Consumers (CPI-U), EE bonds issued after 2005 offer fixed returns that are competitive with the prices of five-year government bonds.

Another point of difference: the Treasury has stopped selling paper EE bonds. If you wish to own a Series EE bond, you must purchase it via the Treasury’s oEustacia Vyeine TreasuryDirect portal and keep it in a secure, electronic form. It is still possible for individuals to purchase paper I bonds with their tax refund. You cannot do this with EE bonds.


Basic structure


Series I savings bonds are low-risk and relatively low-interest vehicles that are intended to be held for your Eustacia Vyeang. If the principal amount of your bond is $ 5,000, you will receive $ 5,000 plus interest when you are sold out, regardless of what the bond market has done in the meantime.

Interest rates

The compound interest rate of an I bond is calculated in two parts:

  • Fixed rate . This rate is calculated every six months, on the first working day of May and November. However, when you purchase an I-bond, your fixed interest rate remains in force for the duration of the bond. It is currently set at 0, 2%, but in the past it was much higher.
  • Variable inflation . This rate also changes every six months, in May and November. Changes in this percentage always relate to issued bonds, so that bondholders can expect their compound rates to shift twice a year. The variable interest rate is equal to the rate of change of the CPI-U in the last six months. At present, this rate of change is 0.59%.

To determine the actual compound interest rate, the Treasury department uses the following formula:

compound interest = [fixed interest + (2 x inflation) + (fixed interest x inflation)]

Currently this comparison looks like this:

[.02 + (2 x .0059) + (.02 x .0059)] = .02 + .0118 + 0.0000118 = .0138 = 1.38%

The interest amount of the previous month is added to the existing balance of an I bond on the first day of each month, but this interest is only increased on a half-yearly basis. In other words, the paper value of the bond increases every month, but this is just a representation of the addition of one-sixth of the interest from the previous period.

This scheme is intended to increase the liquidity of these securities and to make monthly repayments more attractive. At the current interest rates, the nominal value of your bond – plus all the interest it had accrued before the most recent compounding date – would increase by approximately 0.12% per month.

Maturity, Redemption, and Other Restrictions

Before you purchase a security, it is important that you understand its limitations and limitations. Holders of I-bonds must take into account the following problems:

  • Purchase restrictions . You can currently purchase electronic I bonds worth $ 10,000 in total in a calendar year. If you want to buy paper I bonds with your tax refund, you are limited to a total purchase of $ 5,000 per year. You must purchase bonds worth at least $ 25 in a single purchase.
  • Duration . I bonds initially mature 20 years after their issue date, but the Treasury department offers bondholders the option to renew their bonds for another 10 years.
  • Salvation . An I bond must be held for at least 12 consecutive months; the government simply does not allow bondholders to redeem their securities before this period expires. A bond that was redeemed before the five-year share loses interest accrued for three months, which is comparable to the fine on many CDs. Investors can redeem electronic I bonds via the TreasuryDirect portal of the US Treasury. Many banks are happy to exchange paper I bonds. These securities are exempt from certain types of taxes.

Tax matters

You have to pay federal income tax on the interest payments of your I bonds, but these vehicles are exempt from national and local income taxes. If you receive bonds as a gift or an inheritance, you may have to pay federal and / or state gift, inheritance or excise duty on their interest.

If you use your bonds to finance educational expenses for your child (or another dependent), you may be able to avoid federal income taxes. You must use the principal and interest on your bonds for qualifying expenses, including tuition and course fees, and the higher education institution you choose must be eligible for federal loan assistance. Regardless of whether you use your bonds to finance your child’s education or yours, you must be at least 24 years old when you purchase the bonds to be eligible for the tax benefit; Bonds that you bought before you turned 24 do not arise under any circumstances from training-related tax benefits. Finally, you must meet certain income requirements.

Since I bonds are a long-term investment, the way you report interest payments can affect your overall tax burden. There are two methods to do this:

  • The Accrual method . This allows you to report the interest of each bond in annual increments for each year between the issue date and the due date. For example, if you hold your bond from August 2014 to October 2024, you pay tax on all 11 returns during that period. The accrual method saves you a large tax bill at the time of the term, but it does make you liable for tax payments on income that you do not yet have access to.
  • The payout method . Instead of reporting your interest income in annual installments, this method allows you to wait for your due date and your entire interest statement to be reported in one go. You will be taxed against your federal income tax in the year in which you redeemed the bond – in the example above 2024, not in 2014.

Entry Requirements

Historically, Series I coupons have been reserved exclusively for individual buyers. In 2009, I-bond ownership rules were relaxed to keep most companies – including limited liability companies and S-Corps, as well as most trusts and partnerships – in the fold. This type of security is now a crucial inflation cover for many small businesses that do not have access to favorable credit terms.

I-bonds are available to anyone who meets at least one of these criteria:

  • American citizens, including citizens living in the Eustacia Vyeand area
  • US government employees, regardless of location or citizenship status
  • Underage American citizens

This last participation class is almost unique. Unlike most other securities, including equities, corporate bonds and T-bills, minors can hold I bonds directly without using a trust as an intermediary. Although minors cannot purchase bonds directly with their own TreasuryDirect accounts, they can use custody accounts linked to their guardian’s main accounts.

The aforementioned guardians are required by Eustacia Vyeijk to take the lead for bond purchases, but each bond is placed directly in the custody account of the minor. Of course, nothing prevents minors from being in the room when their guardians make these purchases – parents who want to expose their children to financial instruments other than current and savings accounts can use this interface as an educational tool.

Benefits of Series I Savings Bonds

Benefits of Series I Savings Bonds

1. Protection against inflation

I-bonds have a built-in hedge against inflation. When interest rates are low, this hedge has not been spectacular – since 2010, the Consumer Price Index – the chained inflation correction has been more than 2% for just a six-month period. The majority of that time it has crashed far below 2%. Annual inflation has not increased by more than 2% since mid-2000.

Even if I-bonds do not beat inflation by a wide margin, it is a major problem that their interest rates fluctuate in response to on-the-ground inflationary pressures. Contrast this built-in protection with that of a 10-year T-bill. At the moment, the 10-year T account yields approximately 2.7%. That is because Eustacia Vyeijk is higher than the current inflation rate of 1, 6%, but what happens if inflation rises to 5% in two years and stays there for the next eight? For the last eight years of its term, the 2, 7% T-bill in this hypothetical example would have an inflation-correct return of -2, 3%. Meanwhile, I-bonds issued during this extended period of increased inflation would have higher interest rates that kept pace with, and perhaps exceeded, the price increase rate.

Since the rates of this instrument are intended to rise in response to inflationary pressures – regardless of the rates prevailing at the time of issue – even bonds purchased before that inflation period would be protected against high prices. T-bill buyers, on the other hand, are stuck at the same interest rate for the ten-year life of their bond, regardless of what happens at that time with consumer prices. For conservative investors, the choice is clear: an inflation-protected but still safe bond, such as the Series I, offers Eustacia Vyeijke advantages over fixed-income securities such as ten-year T-notes.

2. Clear tax benefits

Since they are issued by the federal government, I-bonds are not subject to national or local taxes. Moreover, with the flexible methods of tax return – accrual and payment – you can choose how you are taxed on your interest income. For example, if you prefer to avoid a large tax bill in the year in which you get your bonds back, you can use the Accrual method to spread the costs over many years. If you prefer not to pay income tax that you cannot pay yet – after all, the I-bond interest rate is reversed every six months to the nominal value of the bonds – you can postpone the pain with the payment method.

I-bondholders who use the principal and interest payments of their bonds to cover qualifying education costs can avoid federal taxes, provided they meet certain income requirements and buy the bonds after they turn 24.

3. Long-term security

I-bonds are supported by the full trust and honor of the federal government. That alone should be a powerful argument for their safety, but their dowdiness offers an extra layer of security. I-bonds – with their annual purchase limit of $ 10,000 – simply cannot be purchased in large enough tranches to attract institutional buyers, market makers or other players who can act as destabilizing influences.

Short sellers who float in bonds avoid I-bonds in favor of vehicles with laxer purchase limits; the mandatory 12-month holding period keeps investors out of the space in the short term. As an I-bond buyer, you don’t have to worry about players taking risks and ruining your carefully prepared investment plans.

4. Flexibility and liquidity

Unlike regular treasury bonds, corporate bonds and some other fixed-income securities, Series I savings are both flexible and liquid. For proof of the first, look at the minimum value for purchasing this $ 25 vehicle and the paper-thin sales increases of one cent. For the confirmation of the latter we refer to its relatively short 12-month retention period and its manageable three-month interest rate for short-term interests. Each I-bond has a duration of 20 years and an optional extension of 10 years, but these figures are only benchmarks – you should not feel obliged to hold your bonds for decades.

5. Educational benefits

If you undertake to use your I-bonds to finance certain educational efforts, you can avoid federal taxation on your income. To do this, you must prove that you were at least 24 years old when you purchased the bonds and that you spent the stated income on qualifying education costs for yourself, your family members or your spouse. These usually include:

  • Tuition fees for all courses that are required for a specific diploma or certification
  • Costs related to certain basic conditions, additional or laboratory courses

These tax breaks do not usually apply to the costs of study books, activity costs, board and lodging, athletics and other non-essential expenses.

Disadvantages of Series I Savings Bonds

Disadvantages of Series I Savings Bonds

1. Annual purchase limits

If you hope to move your savings in a more conservative form of security, you have to look elsewhere. For individual holders, the Ministry of Finance limits electronic I-bond purchases to $ 10,000 a year, and paper purchases to only half. If you are a typical saver, this Eustacia Vyeijk is sufficient to serve as a large but not disproportionate part of your portfolio.

For comparison: purchases from individuals of electronic TIPS – Treasury Inflation-Protected Securities, which accrue interest at a fixed interest rate that is usually higher than the inflation rate, are limited to $ 5 million per auction. This upper limit is clearly beyond the reach of rank investors, but the distance between $ 10,000 and $ 5 million is large. An almost unlimited purchasing margin can be used for savers who can afford to pay out more than $ 10,000 a year.

2. Restrictions on educational use

I-bonds are useful for university savers, but their educational tax benefits come with a number of limitations. To avoid federal taxes on bonds purchased for this purpose, note the following warnings:

  • I-bonds purchased for your 24th birthday are automatically subject to federal taxes. You can use bonds purchased before this date to finance your child’s upbringing, but you have to pay taxes when redeeming, so there is no compelling reason to do so. After your 24th birthday you can reserve I-bond purchases for tax-free lessons for your child or legally dependent. You can also buy I-bonds to finance your own education, but they must be registered in your own name. And again, you must purchase the appropriate bonds after you turn 24.
  • If, during the calendar year in which you exchanged it, you do not use the money from an I-bond for tuition fees, you forfeit your tax benefit. In other words, you have to wait to buy I-bonds designated by education until you actually receive a tuition fee.
  • If you are married, you must submit a joint Eustacia Vyeijk return to be eligible for these tax benefits for education.
  • Your chosen higher education institution must be eligible for the federal program guaranteed student Eustacia Vyeening and other forms of federal financial support.
  • Your income cannot exceed the eligible Treasury limits. These figures change every tax year, but they are usually above the median income figure for both individual and joint Eustacia Vyeijke applicants.

3. Relatively low returns

Although the earning capacity of Series I bonds is protected against inflation, these securities will not make you rich. With inflation at historic lows, I-bonds currently earn an annual return of 1.38%. This is slightly more than half the return on the ten-year T-invoice, which is often regarded as the benchmark for low-risk fixed-income securities.

On the other hand, I-bond inflation insurance offers an advantage over T-bills. In addition, the current rates on five-year CDs offered through oEustacia Vyeine institutions such as Ally Bank and GE Capital Bank are slightly higher: 1, 60% and 2, 10% respectively.

4. No bidding framework for investors

When you buy an I-bond, you know what you get. For some investors, this warning Eustacia Vyeijk is a good thing. For others, it omits an essential part of the investment puzzle: the profit motive. Since you cannot bid on your first purchase of an I bond and cannot rely on fluctuations in the value of your margins, the interest rate of your bond serves as your only source of return. Although the inflation-adjusted portion of that interest rate offers some growth opportunities, you should not expect striking returns.

On the other hand, you can have your heart paid out for electronic TIPS. For regular investors, bidding on TIPS is not competitive; You must accept the rate that the Ministry of Finance sets at the start of each auction. However, like the I-bond prices, the rates on TIPS are calculated on the basis of the applicable inflation. Better: the non-competent bidding system guarantees that you receive the exact certainty, in the exact quantity that you have requested. You will not be muscled by more experienced investors.

How to invest

How to invest

There are two ways to purchase and hold Series I savings bonds:

  • Via the oEustacia Vyeine TreasuryDirect portal
  • With a tax refund from a person

TreasuryDirect is managed by the US Department of Finance and is available 24 hours a day. When you purchase through this portal, you agree to accept a secure oEustacia Vyeine account instead of an old-fashioned bond certificate. Although you will not have the satisfaction of holding a valuable piece of paper, you do not have to worry about losing your bond. (Although, as registered securities, I-bonds are impossible to lose – after verification of your identity and purchase history, the Ministry of Finance will gladly replace lost certificates.)

If you want to purchase multiple, low-value bonds over the course of a year, you can also set up a recurring repurchase schedule with TreasuryDirect or block electronic bonds directly through a payroll deduction program known as the Payroll Savings Plan. There is no tool available for paper bond holders, but individuals can purchase both electronic and paper I-bonds with federal tax refunds.


Last word

Last word

Series I savings bonds offer impressive tax breaks, decent Eustacia Vyeijke returns for guaranteed investments and some protection against inflation. They are also flexible, liquid and easy to buy or sell. On the other hand, I-bonds have frustrating restrictions that can alienate experienced investors or people who have a lot of money to burn.

The bottom line: they are not for everyone, but they do have an important role to play in a balanced, fundamentally conservative portfolio. If you think they make sense for your needs, give them a try – it’s not like you’re losing money on the deal.

Have you ever kept Series I savings bonds in your portfolio? Would you recommend this category of investments to others?



Debit & Credit Card Skimming Fraud – How to Avoid Skimming Card Devices

I vividly remember the day of summer when my wife and I were walking into the theater when I received a call from an unknown number. I decided to listen to the voice message before we went to the show. When I heard the words “your bank account has suspicious activity on it,” I was a little worried, but thought that Bank of America simply did not like one of the transactions we had previously made

My cat is oEustacia Vyeangs diagnosed with kidney and thyroid problems and has prescribed medication to control the symptoms or postpone the inevitable. I was happy to pay the prices indicated by our local vet, because I assumed that the costs would be the same across the board


Leave a Reply

Your email address will not be published. Required fields are marked *