Series I bonds pay 9.62 percent interest until the end of October 2022.
Until the end of October 2022, it is possible to purchase Series I bonds that pay 9.62 percent interest. The 9.62 percent interest rate is applicable for 6 months from the time of purchase. The interest earned for the first six months gets added to the principal, then interest on that interest is earned during the next six months.
On November 1, 2022, the US Treasury Department sets a new six-month rate equal to the fixed rate (currently zero), plus the Consumer Price Index inflation rate.
This seems like a great deal, and there must be a catch. The only catch is that the government keeps the money, both the principal amount and interest, for at least one year.
Bond Mechanics
Technically, a 30-year bond is being purchased and the interest rate changes every six months. It is possible to cash out anytime after one year but cashing out before five years will forfeit three months’ worth of interest.
It is like a Roth IRA without age limits and penalties because there are no taxes paid on the interest until the cash out. One can get the compounding effect tax-free.
Investors cannot lose the money they invest or the interest earned, other than the three months’ worth if a cash-in is done before five years. For a cash-in, federal income taxes are paid, but not state, county, or city income taxes. It is possible to avoid taxes on the interest altogether if the money is used for qualified higher education expenses.
The Only Downside
The major downside to the bonds is that one cannot buy more than the annual limits. There is no overall limit, only annual limits.
A person cannot buy more than $10,000 per year, although if one buys from treasurydirect.gov and utilize tax refunds, one can acquire $15,000 bonds per year.
For married investors, a spouse can buy $5,000 of bonds, making the total up to $20,000 per year.
If a corporation is added, such entities can purchase up to $10,000 of the bonds per calendar year.
Purchase Series I Bonds Now
If a person buys $10,000 of Series I bonds now, he earns 9.62 percent interest for the first six months. The Treasury Department adds that interest to the principal amount, so interest can be earned on the interest for the next six months.
If inflation stays at what it is, a person earns 9.62 percent on his Series I bond for the full year. At the end of the year, the bond has a principal balance of $10,985.
If a person cashes out, he forfeits three months’ worth of interest. But three-quarters of 9.62 percent is 7.22 percent still making it a great risk-free investment.
The Series I bond is based on inflation. If inflation drops to zero, cash out the bond. Meanwhile, it is great advice to ride this inflation wave. Remember that a Series I bond cannot go down in value, so the principal balance never goes down and deflation cannot hurt it.