The initial annualized rate on new Series I savings bonds sold from May through October of this year is 9.62%.
Illustration: Martin Tognola
A popular investment backed by the U.S. government recently became even more attractive, especially for tax-smart investors who are worried about inflation.
I wrote about the tax advantages and other aspects of Series I savings bonds in a column earlier this year. That column garnered a lot of follow-up questions from Wall Street Journal readers. The popularity of these investments is likely to continue with the U.S. Treasury announcing a few weeks ago that the initial annualized rate on new Series I savings bonds sold from May through October of this year is 9.62%.
To be sure, no investment is perfect for everyone. But series I bonds have so many attractive features that they represent an “absolutely superb” investment opportunity, says
author of the investment classic “A Random Walk Down Wall Street.”
So then, here are answers to some of those reader questions as well as other queries that investors may have about the bonds.
If I buy these Series I savings bonds, what’s the minimum amount of time I have to hold them?
At least one year. If you can’t afford to lock up any money for at least that long, these bonds aren’t for you. But if you can, keep in mind that they can continue to earn interest for 30 years, or until you decide to cash them in, whichever comes first. If you redeem them before five years, you lose interest for the previous three months. “For example, if you cash an I bond after 18 months, you get the first 15 months of interest,” the Treasury website says.
If I buy now, am I guaranteed to get that 9.62% rate for as long as I hold the bonds?
No. That 9.62% rate is only the initial annualized rate on new I bonds sold from May through October of this year. That rate “is applied to the 6 months after the purchase is made,” the Treasury site says. “For example, if you buy an I bond on July 1, 2022, the 9.62% would be applied through January 1, 2023. Interest is compounded semiannually.”
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The Treasury resets the rate every six months based on a formula tied to inflation. Since nobody knows precisely what will happen on the inflation front, we don’t know today what the new initial rate will be starting in November.
“Rate updates affect both new and previously issued bonds,” a Treasury spokesman says. “The composite interest rate that applies to a Series I savings bond is updated every six months from when the bond is issued until the bond matures.” For more details on how the bonds earn interest, see the Treasury’s site.
Are there limits on how much of these bonds I am allowed to buy each year?
Yes. The annual limit is $10,000 per person, according to the Treasury. You can buy the bonds in electronic form from Treasurydirect.gov, and you can also buy up to an additional $5,000 a year in paper I bonds by using your federal income-tax refund. Also, many investors buy Series I bonds not only for themselves but also as gifts for relatives, friends and others.
If you buy them as a gift, the purchase amount “counts toward the annual limit of the recipient, not the giver,” the Treasury says. Asked whether the limits might be raised, the Treasury spokesman replies: “There’s not a proposal under consideration that would lift the cap.”
I bought $10,000 of Series I bonds late last year. Do I have to wait until 12 months from the day I bought them to buy more? Or can I buy more anytime this year?
You don’t have to wait 12 months. You can buy more at any time during 2022. “The annual purchase limit applies on a calendar-year basis and resets on Jan. 1,” according to a Treasury spokesman.
Interest rates generally have risen significantly. Could the value of these bonds drop below my purchase price?
No. The Treasury says the value of your I bonds can’t ever be less than you paid for them: “The interest rate can’t go below zero and the redemption value of your I bonds can’t decline.”
What are the most important tax advantages with savings bonds?
Interest income on savings bonds is exempt from all state and local income taxes. That can be an important attraction for many upper-income investors in high-tax areas, such as California and New York City. (But some states, including Florida, Texas, Washington and Nevada, don’t have a state income tax.) The Tax Foundation has details on state taxes.
Part or all of the interest might also be excluded from federal income tax, but only under certain circumstances. “Using the money for higher education may keep you from paying federal income tax on your interest,” according to the Treasury. But there are important limits, such as the size of your income, and other fine print. The income thresholds typically change each year. For details, see IRS Form 8815.
Another attractive feature that may surprise some taxpayers: Bondholders have flexibility in deciding when to report the interest income. Most taxpayers choose to postpone reporting the interest until they file a federal income-tax return for the year in which they receive “what the bond is worth, including the interest,” the Treasury says. But there is another option: Report the interest each year, which could be a smart move for someone with little or no taxable income.
For more information, see TreasuryDirect’s answers to frequently answered questions.
Separately, a reader asked a question about qualified charitable distributions, or QCDs, a tax-smart technique used by many older investors to donate to charity from a traditional individual retirement account. Specifically, the reader wanted to know whether taxpayers who make a qualified charitable distribution and qualify to exclude the entire amount from income can deduct that transfer on their federal income-tax return as a charitable donation.
The answer: No. “You can’t claim a charitable contribution deduction for any QCD not included in your income,” the IRS says in Publication 590-B.
Even so, this technique can still be valuable for many older taxpayers for several reasons. A QCD typically allows investors age 70½ or older to transfer as much as $100,000 each year directly from the IRA to a qualified charity without having any of that transfer subject to tax. If done correctly and you’re 72 or older, this transfer counts toward whatever your required minimum distribution is for that year. Also, it doesn’t even get included in your adjusted gross income, which is an important number that can affect many other items on your tax return.
Warning: Donor-advised funds aren’t considered qualified charities for this purpose.
Mr. Herman is a writer in California. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to email@example.com.