Series I bonds: Everything you must know

Photo by Craig Adderley

In an era of low CD rates, Series I savings bond rates are astounding — currently 9.62%! Interest rates on Series I bonds are adjusted every six months to reflect inflation.

From May 1 through November 1 the interest on I bonds is 9.62%! That rate will be paid on all I bonds purchased during this period for the succeeding six months, whether you bought them in early May or waited to buy them until late October. There’s no rush – you’ll get six months’ interest at the current 9.62%!

And if rates adjust higher in November, as seems likely, you’ll also get a guaranteed six months of that higher rate, starting immediately after the current six-month rate ends!

Here’s what you need to know about buying Series I bonds:

—The only place to buy savings bonds now is through the federal government website, where it’s easy to set up an account and make your purchase with money taken directly from your bank account. You will need your bank routing and account numbers. You’ll see your purchase in your account the next business day.

—You can open an account in your name, using your Social Security number. Spouses must each open a separate account, even if the money is coming out of a joint bank account. You can open an account in the name of your revocable living trust. And you can still buy “gift bonds” (see below). But you cannot purchase savings bonds in an IRA.

—There is a $10,000 per person per year limit for purchases of savings bonds. (You can also buy an additional $5,000 per year in bonds using your tax refund. But the request must be made at the time you file your taxes.) Minimum purchase is $25.

—The purchase limitation is based on the Social Security number. So, each spouse, for example, could purchase $10,000 of bonds. There is one exception: if you also have a revocable living trust that uses your Social Security number, it can also buy $10,000 worth of bonds in one year, in addition to the $10,000 purchase in your own name.

—Bonds can also be registered for two people, using the designation “with” or “POD” (payable on death).

How interest on savings bonds is paid and taxed:

—You must hold the savings bonds for at least one year. If you sell before holding for five years, you’ll lose the last three months’ earned interest.

—You won’t see interest posted in your TreasuryDirect account until the fifth month after purchase. That reflects the potential three months’ loss of interest, as well as the fact that interest isn’t paid until the month after it accrues. But you do get six full months’ worth of interest credited eventually.

—As noted above, you’ll earn the stated rate of interest for six months no matter when during the period you buy them. Then the rate will automatically adjust to the then-current rate for the next full six months.

—You pay Federal (not state) tax on savings bonds when they are cashed in or when you change ownership of existing bonds.

—If you need access to cash, you can redeem only a portion of your bonds, paying taxes and any penalties.

The rules for gifting bonds have been adjusted for these digital bonds.

—You can still gift bonds using the Social Security number of the recipient if they have a TreasuryDirect account. But you can also gift using their Social Security number but keep the bonds in your own account, to be distributed at some time in the future at your choice or after your death.

—Or you can create a “minor-linked” parental account that gives the child full control at age 18 (and may impact college financial aid).

—Ownership of bonds at death depends on how you have titled the bonds. If there is a POD or “with” designation, the other named owner can keep the bonds and keep earning interest on them. Or they will be distributed by a trustee or will executor. But there is no “step-up” cost basis for the bonds at death, so the estate or recipient is responsible for taxes on all accrued interest.

Series I bonds are the ultimate “chicken money” investment, with safe, higher interest rates that keep up with inflation, albeit with a holding period.