By: Maria Alejandra Pulgar
In an economy that has been hit multiple times since the pandemic, it is a challenge to find ways to protect the value of money from inflation, to invest safely and get a good return. However, an opportunity is there with the Series I Saving Bonds from the Department of Treasury.
This particular instrument becomes appealing this year for three simple reasons: First of all, they are guaranteed by the US government; second of all, they can be purchased online at the US Department of Treasury website, starting at $25, and on top of that, they are yielding 9.62% annual interest if purchased before October 2022. There is also a chance of purchasing these bonds in paper using the tax return, starting at $50 up to $5,000.
An investment on I Bonds can be up to $10,000 per person per calendar year, beginning at $25 if purchased online, which makes them a great gift for momentous occasions such as births or graduations, or for kick-starting a savings fund for a special purpose in the future.
These Bonds can be purchased only by US Citizens or Permanent Residents older than 18 years or on behalf of a minor. This investment must be kept at least for 12 months; if sold after that time but before five years, a penalty worth three months of the interest accrued will apply.
Inflation has reached a historic high in 2022. Investing on this financial instrument, which will yield an interest of 9.62% at least for the first six months, is a smart way to preserve the value of the hard-earned money, better than keeping the cash “under the mattress” or in savings account that yields 1% tops a year.
“Bonds Lingo” 101
It is important to master several concepts before proceeding with the purchase of a bond investment, to ensure that the experience provides the expected results:
A Savings Bond is a financial investment product with a low risk of losing its value over time. According to the US Department of Treasury, the Series I Bonds are “savings bonds that earn interest based on combining a fixed rate and an inflation rate”. The current interest rate is 9.62% for six months for all I Bonds purchased until October 2022, beginning at the date of purchase. The rate is recalculated every six months.
The Maturity Period of a Bond is the span of time during which a bond owner will receive interest on their investment. The Series I Bonds have a maturity period of 30 years; therefore these were created to be long-term investments.
The Financial Dictionary defines Interest Yield as “the interest paid on a bond, expressed as a percentage of its current price”. The Series I bonds earn interests with a fixed rate and “a variable rate that is adjusted twice a year based on inflation rate”.
When do you receive the interests from these bonds?
When investing in bonds, patience is a virtue. Series I bonds cannot be cashed out before the first year, and if cashed before the fifth year a penalty of three months of yield interests is charged. Therefore investors should think twice before proceeding with the purchase if they are not sure if they will need the money soon.
The moment the bonds are cashed out, the owners receive, along with the original amount of purchase, the interest yield for the whole time they owned the instrument. Earnings for bond investments are subject to federal income tax on the year they are cashed out, unless the amount is used to cover higher education costs.
The interest rate for these bonds is adjusted twice a year based on inflation, which protects the invested capital’s worth. For the first six months, regardless of the month of purchase, the investor gets the interest rate current at the moment of purchase. The money keeps earning interests until maturity date or until cashed out, whatever happens first, with the rates adjusted every six months. It is a safe investment because it is backed by the US Department of Treasury.
Purchasing Series I Bonds
Only US Citizens or Permanent Residents are eligible to buy these bonds. No corporate investors are allowed, with the exception of trusts or estates which can purchase these instruments for their beneficiary.
Those interested in purchasing the bonds should set up an account on the Treasury website, providing their Social Security Number and other additional information. After registration, parents or guardians may also include their children’s information to purchase bonds on their behalf or the SSN of the person who will be beneficiary in case the purchase is a bond gift.
It is extremely important to save all access information for the Treasury Direct portal in a safe place; otherwise, it will be very difficult to cash out the bonds when the moment comes.
Online Series I bonds can be purchased starting at $25 until $10,000. Paper bonds can be purchased too starting at $50, and they arrive in the mail. The purchase of bonds using the tax return is done when filing the taxes for the year, with a special form for that purpose.
Once completed the steps to proceed with the payment, online bonds are created and saved in the Treasury Direct account, where they can be reviewed periodically until they are cashed out.
Purchasing these Series I bonds is safe, easy way to put your hard-earned money in a place where it can continue to grow over time; it is worth giving a thought to the option.
For more information visit www.treasurydirect.gov/