Experts answer three difficult questions about Series I bonds

Demand for Series I bonds, an inflation-protected and almost risk-free asset, has skyrocketed as investors seek refuge from sky-high prices and stock market volatility.

While annual inflation rose by 8.6% in May – the highest rate in more than four decades, according to the US Department of Labor – I-bonds are currently paying a 9.62% annual interest rate through October.

It is particularly attractive after a rough half year for the S&P 500, which fell by more than 20% since January, limiting the worst six-month start to a year since 1[ads1]970.

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In fact, since the annual I-bond yield jumped to 7.12% in November, 1.85 million new savings bond accounts have opened through June 24, according to financial authorities.

“In-bonds are a great tool for both cash reserves and investment portfolios,” said certified financial planner Byrke Sestok, co-owner of Rightirement Wealth Partners in Harrison, New York.

Supported by the US government, I-bonds will not lose value. And if you’re comfortable with not touching money in 12 months, current rates “dwarf” other cash reserve options, he said.

Still, there are nuances to consider before collecting money into these assets. Here are answers to some of the more difficult I bond questions.

The I-bond yield has two parts: a fixed interest rate and a variable interest rate, which changes every six months based on the consumer price index. The US Treasury Department announces new rates on the first business day in May and November each year.

With rising inflation over the past year, variable interest rates have jumped, rising to an annual rate of 7.12% in November and 9.62% in May. However, the first six-month interest rate window depends on the date of purchase.

For example, if you bought I bonds on July 1, you will receive the annual interest rate of 9.62% through December 31, 2022. After that, you will start earning the annual interest rate announced in November.

While I bond yields avoid state and local taxes, you’re still on the hook for federal taxes.

There are two options to cover the bill: report interest each year on the tax return or defer until you redeem the I-bond.

While most people procrastinate, the choice depends on several factors, explained Tommy Lucas, a CFP and registered agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

For example, if you choose to pay I-bond interest tax each year before you receive the income, you will need a different source of income to cover those fees.

But if you have earmarked these funds to pay for education expenses, the interest is tax-free, so it does not make sense to pay fees annually, he said.

“All of these decisions come back to the ultimate purpose of this investment,” Lucas added.

When creating a TreasuryDirect account to buy I bonds, it is important to add what is known as a beneficiary name, and name who inherits the assets if you pass away.

Without this designation, it becomes more challenging for loved ones to collect the I-bonds, and may require time and expenses to go through the probate court, depending on the I-bond amount, Sestok explained.

“Personally, I make sure my clients do it right in the first place,” he said, explaining how adding recipients in advance can avoid headaches later.

However, if you are creating an account without a recipient, you can add one online by following the steps outlined here on TreasuryDirect. You can call support with questions, but they are currently experiencing “higher than normal call volume,” according to the website.

With a named recipient, I-bond heirs can continue to hold the asset, redeem it or have it reissued in their name, according to Treasury Direct.

The accrued interest until the death can be added to the original owner’s final tax return or the heir’s archive. Regardless, the recipient can decide whether he will continue to defer interest or not, Lucas said.