Treavor Dodsworth CFP®, CPA, CKA®
#119 - Series I Savings Bonds (more exciting than it sounds!)
I had no idea what to buy my family for Christmas… until today. As of the time of writing this article, Series I Savings bonds are paying an annual rate of 7.12% for at least 6 months (please check current rate). Much of the information in this article came from the Kitces.com - article linked below. Savings and CD rates are not good right now. Many of the higher interest savings accounts are only paying about 0.5% (though you can find higher). Series I Savings bonds are a way to earn significantly more than 0.5%. What are some characteristics of these bonds...
Series I Savings bonds have an interest rate that is determined by a fixed rate (currently 0%) and inflation rate (which was 7.12% at the time of writing this article). This rate will stay the same for the first 6 months after a bond is purchased. At which point it will be recalculated but cannot be less than 0%.
There is a limited amount you can purchase. Generally speaking, $10,000 per person per calendar year though there are ways to purchase more (see Kitces.com article below). In other words, you could purchase some now before the end of the year and then again after the first of the year.
The bonds have to be held for at least 12 months. If you sell between 12 months and 5 years, you have a penalty of the last three months of interest.
Option 1: Buy a $10,000 12mo CD at 0.5% interest. At the end of 12 months, you have about $10,050.
Option 2: Buy a $10,000 Series I Savings bond. You earn 7.12% for 6 months and worst case 0% for the next 6 months. At the end of 12 months, you still have about $10,361 even if the bonds earn 0% over the second 6 months.
A few hundred dollars may or may not be worth chasing to you but once you start thinking that you could buy some this year and next year and that both husband/wife could do it and that you could buy even more using an entity or trust and that the interest rate on the Series I bonds 6 months from now will likely not be 0%- the savings can turn into several thousand dollars.
Interesting Article(s) or Video(s)
Kitces.com - Series I Savings Bonds: End-of-year Strategies To Take Advantage Of the Current High Interest Rate
Jeffrey Levine goes into more detail about Series I Savings Bonds.
IRAhelp.com - Exceptions To the Pro-Rata Rule - Ways to “Isolate Basis”
Occasionally through various reasons, people can end up with basis in their Traditional IRAs. The primary disadvantage to this is any growth on that basis is likely subject to ordinary income tax when withdrawn while if instead, that money was in a Roth IRA growth would likely be tax-free. The Pro-Rata rule can make it challenging to get the basis into the Roth IRA but there are some exceptions. Notably, at the time of writing this article there was a pending law that could make it not possible to transfer basis to the Roth IRA so time is of the essence and please check current laws.
Thank you for reading!