More on the Series I Bonds from the US Treasury

If a Series I bond is purchased from now through October 31, 2022, it can earn 9.62 percent for six months, guaranteed.

The Treasury Department at the end of six months:

• adds the interest earned to the principal, and
• pays interest on the new principal balance at the new rate that is determined on November 1.

For example, $10,000 of Series I bonds are bought on September 24.  At 9.62 percent for six months, the total earnings become $481 ($10,000 x 9.62 percent divided by 2).  By March 24, the principal balance is $10,481 ($10,000 + 481).

If the Treasury Department sets the interest at 9 percent on November 1, this 9 percent interest rate can be earned on $10,481.  At the end of a full year, the Series I bond account is $10,953.

The Series I bond benefits are four-fold:

• The principal cannot be lost (the $10,953 in the example cannot go down).
• Interest rates on I bonds track with the consumer price index inflation rate, which has recently been high.
• Tax-deferred compound interest is earned until the bond is cashed in.
• The interest is exempt from state and local income taxes.

There is much to like with a Series I bond, and very little to dislike.  Probably the biggest dislike is the $10,000 limit on I bond purchases online.  But there are a few ways to increase Series I bond purchases.

Purchase Online

With online purchases, an investor, his spouse, his LLC, his living trust, and his corporations can buy up to $10,000 each for each calendar year. There are several opportunities for purchase when applying for a new I bond account:

For a business or organization, one can purchase as a:

• Corporation,
• Partnership
• Limited Liability Company (LLC)
• Professional Limited Liability Company (PLLC)
• Sole Proprietorship

For an Estate or Trust, one can also purchase as a:

• Deceased Estate
• Court-Appointed Living Estate
• Trust

For example, a married couple operates two corporations, has an LLC that manages their rental property, and has a living trust.  With all of these, they can have six online accounts with Treasury Direct:

• Husband personal
• Wife personal
• Corporation 1
• Corporation 2
• LLC
• Living trust

For this 2022 calendar year with their six accounts, Michael and Martha can purchase up to $60,000 and another $60,000 in January 2023 for the calendar year 2023.  This means that at the end of January 2023, they can have around $120,000 of Series I bonds in their electronic accounts with Treasury Direct.

Purchase through a Tax Return

Another purchase option is that an investor can buy up to $5,000 of paper I bonds using his personal federal income tax refund.  The downside of this is that the $5,000 limit applies per personal tax return.  This means regardless of filing status as single, head of household, or married, the Series I bond tax refund purchase limit is $5,000.

Note that the tax return privilege for Series I bonds is for Form 1040 only.

Create Gift Boxes

Series I bonds can be purchased as gifts, even as a gift to a spouse.  The annual $10,000 limit on electronic I bonds bought applies to the recipients.

For example, a grandfather-investor buys $10,000 of I bonds for his 12 grandchildren.

As the grandfather-investor does this, he opens 12 gift boxes at Treasury Direct.  The $10,000 in each gift box stays there until the grandfather-investor delivers the gift.  He won’t owe any 2022 gift taxes on the $10,000 because each $10,000 gift is under the 2022 gift exclusion of $16,000.

If the grandfather-investor opens the gift boxes on September 26 and waits for a full year before delivering the bonds to his grandchildren, the bonds earn interest and compound in the gift box as shown in the computation above.

In the computation above, the interest accumulations for each I bond a year later may be worth $10,953.  If the gift is delivered when the bond is worth $10,953, the gift recipient’s basis is $10,000 and the deferred interest is $953.  The gift tax exposure was when the $10,000 was placed in the gift box.

The grandchildren recipients receive the gifts with a holding date beginning at the date of purchase.  The grandchildren can cash the bond because they have held it for more than a year.  The only downside is that they forfeit three months of interest.

Gifting a Spouse

Remember that a gift of any amount can be given to a spouse without the worry of gift taxes provided that the spouse is a U.S. citizen.  An investor can create gift boxes for a spouse.  An investor can create more than one gift box for a spouse or any other person, but the gift cannot be delivered if the spouse or the other person has already contributed the $10,000 maximum for the year.

The good news is that the money in the gift box earns interest and compounds while it is in the gift box.  This is true whether $50 is put in one gift box or $50,000 is placed in five gift boxes with $10,000 each.

If an investor creates a $10,000 gift box for a spouse, a year from now it will be worth $10,953.  If the spouse does the same and creates a $10,000 gift box for the investor, a year from now it will also be worth $10,953.

This means that the investor and his wife will have four accounts (including their personal accounts) earning at the high current interest rates.

The spouse gift strategy can be continued if the interest rates remain high, but one can deliver no more than $10,000 of the original principal amount of the bonds each year to any gift-box recipient.  It is therefore good to be mindful of future interest rates.

How the Series I Bond Works

Every six months, the Series I bond interest rate is set by the Treasury Department.  It is based on inflation changes in the non-seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) for all items, including food and energy.

Take a look at the annual interest rates on I bonds from May 1, 2020, through May 1, 2022:

The Federal Reserve is working hard to get inflation under control, and it has an inflation target rate of 2 percent.  Since it is going to take some time to get inflation under control, investors can enjoy a high-performing interest rate harvest.

Investors earn interest from the date of purchase, based on the rate in effect on the date of purchase.  The interest accrues until the bond reaches 30 years or when the account owner cashes in the bond, whichever comes first.

The interest is compounded semi-annually.  From the purchase date, the interest earned for the next six months is added to the bond’s principal value.  This creates a new principal value that then earns interest for the next six months.

An account owner can cash the bond after 12 months.  But if the bond is cashed in before it is five years old, the last three months of interest are lost.

Still, the Series I bond is a big deal.  It is hard to find an investment that does not decline in value.  Remember:

• The I bond interest rate cannot go below zero.
• The I bond redemption value cannot decline.

For the short term, what other financial interest can one earn 9.62 percent tax-deferred interest, risk-free?