Series I Bonds: Treasury’s Best Kept Secret
June 03, 2021
By Dan Gibson
Are you looking to put the cash investment portion of your portfolio into something other than certificate of deposits or bank savings accounts that pay zero point nothing in interest? Among several investments options now provided by the U.S. Treasury, the Series I Bonds could be one of the best. Series I Bonds pay interest based on two components: (1) fixed rate of return, for the life of bond; and (2) a semi-annual rate that changes with fluctuations in inflation measured by the Consumer Price Index. Currently, the Series I Bonds yield 3.54% through November 2021. Since these bonds are backed by the U.S. government, the investment is virtually risk free.
If you’ve never heard of this investment before, don’t worry. Series I Bonds were introduced 1998. Of the $21.6 trillion currently invested in U.S. government bonds, only 0.2%, or $46.3 billion, are in the form of Series I Bonds. Why the seemingly big secret? Much like self-directed IRA accounts, there are not enough incentives for financial advisors to discuss Series I Bonds with their clients. These bonds are only available through Treasury Direct.gov, which doesn’t pay any investment commissions.
The tax effects of Series I Bonds are favorable. Interest is never taxed for state and local purposes. The bonds are a zero coupon bond. Thus, for Federal tax purposes, you can either record interest on the accrual method (recognizing interest income on a yearly basis) or record interest on a cash basis (recognizing the accrued interest in the year of the bond redemption).
There are several caveats to know. Investments in Series I Bonds are limited to $10,000 per Social Security number per year. The minimum purchase is $25, and you must hold the bonds for at least one year. If you redeem them within five years, you forfeit the last three months of interest. Bonds mature in 30 years, but they can be cashed out for full principal and accrued interest any time after five years. The bonds can only be purchased through the U.S. Treasury Website.
Interest rates can go up or down depending on the rate of inflation. However, unlike Treasury Inflation-Protected Securities, the rate will never go below zero.
The Series I Bonds are a great investment for those trying to preserve portfolio capital and keep up with inflation to preserve the purchasing power of that capital.