Should I Buy a Series I Savings Bond?

September 29, 2022

With inflation reaching multi-decade highs, many investors and consumers are looking for ways to optimize yield on savings. As the Federal Reserve raises interest rates, we have begun to see rising yields on savings accounts, checking accounts, and Certificates of Deposit (CDs). Unfortunately, stubborn inflation continues to eclipse these bank yields – resulting in negative real returns. But is there a sliver of silver lining in high consumer prices? Increasingly, savers are turning to Series I Savings Bonds to fight back against inflation.

What Are Series I Savings Bonds?

Series I Savings Bonds are Treasury-issued savings bonds backed by the full faith and credit of the US government. They are issued with 30-year maturities, and like other US government bonds, are considered safe investments.

Variable Interest Rate

Unlike most bonds, Series I Savings Bonds pay an interest rate that is variable and reset twice per year, on May 1st and November 1st.

The interest rate is calculated based on two underlying factors: a fixed rate, which remains fixed throughout the lifetime of the bond, and an inflation rate, which is reset semiannually.

The inflation rate component, which tracks data like the Consumer Price Index (CPI), provides an ongoing hedge to continued inflation – helping to ensure that invested dollars keep pace with the rising cost of goods and services.  High inflation? Higher yield! But the varying yield cuts both ways – falling inflation would ultimately result in a lower yield on your bond. Current inflation readings are producing attractive yields on Series I Savings Bonds, and investors have taken notice.

Tax Benefits

Series I Savings Bonds also feature some tax benefits. First, interest isn’t taxable to investors until bond redemption – allowing for strategy and planning around when to make a redemption. Furthermore, in certain circumstances, interest can be excluded from income when proceeds are used to pay for qualifying higher education expenses.

CONSIDERATIONS

 

In light of the appealing attributes mentioned above, we believe Series I Savings Bonds are an interesting option for investors – if a few considerations are kept in mind.

Limits

Want to put your whole savings into Series I Savings Bonds? Not so fast. Each investor is limited to purchasing $10,000 of electronic Series I Savings Bonds per calendar year (plus an additional $5,000 in paper bonds, if desired), however, purchases are on a per-SSN basis, so spouses or families can increase exposure by having each family member purchase bonds. Depending on your overall financial position, this may or may not be feasible.

Liquidity

Series I Savings Bonds have 30-year maturities but can be cashed out early. However, these bonds carry an initial 1-year holding period requirement, and any liquidations in years 2-5 carry a slight penalty in the form of forfeiture of three months’ interest. As such, we encourage clients to allocate cash only to the extent that they are comfortable parting with it for a number of years.

Logistics

You can’t buy Series I Savings Bonds through your normal bank or custodian. They must be purchased through Treasury Direct (treasurydirect.gov) by the individual in question. This means that investors need to be organized and keep track of these holdings outside of their other portfolios/accounts.

Final word

With these caveats in mind, Series I Savings Bonds are an attractive option for investors to generate some extra yield on otherwise idle cash reserves. Questions? Contact your FLPutnam advisor.

 

Quick Facts 

 

Denominations

Electronic bonds: $25 and above, in penny increments
Paper bonds: $50, $100, $200, $500, $1,000
Purchased at face value

Minimum Purchase

Electronic: $25
Paper: $50

Buy Limit

Electronic: $10k per SSN/year
Paper: $5k per SSN/year

Interest

Variable, Fixed + Inflation-based

Current Rate

9.62%, through October 2022

Maturity

30 Years

Where to buy

Electronic: TreasuryDirect.com
Paper: After your tax filing

Taxed

Federal, not state, upon redemptions
Exceptions if used for education

 

Disclosures

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