Ep. 172 – I Bonds – How They Work

Have you heard of I bonds and are wondering how they can work for you? An Inflationary bond is an interest-earning bond issued by the government.

Even though the money market isn’t looking very attractive right now, I bonds seem attractive and are as of today paying up to a 9.62% rate of return.

In this episode of the Secure Your Retirement podcast, we talk about I bonds, what they are, and how they can benefit you. Listen in to learn how to buy I bonds and make them the most efficient for you with their rate of return.  

In this episode, find out:

●     Understanding an I bond and why it’s attractive to buy during this inflation.

●     How to buy I bonds individually from the government online.

●     The I bond limitation per person and why it’s not a save-all to the market issues this year.

●     The factors that affect the I bond interest rate plus the holding period that makes sense.

●     How the I bond is taxed federally and at your ordinary income.

Tweetable Quotes:

●     “An I bond is issued by the government, and it is a bond that is going to earn interest.”– Murs Tariq

●     “To make the I bond the most efficient, you want to have it in your mind that you hold it for at least five years.”– Murs Tariq

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s he full transcript:

Radon Stancil:	Welcome everyone to our security retirement podcast. Today we’re going to talk about something that we get questions about quite a bit, because it’s made, I guess you might say a lot in the news and that is I bonds.
	Now let me just kind of get a little bit of background. Obviously folks right now are trying to say hey, how do I keep my money secure? The stock market’s not doing that well, the bond market’s not doing that well, but then this idea of an I bond sounds very attractive and we’re going to talk about why. The reason why is cause the return on them right now that is being talked about is very, very, very attractive.
	So we get these calls in, should I do an I bond? People would love to be able to put a lot of money into an I bond, but there’s restrictions and guidelines on how to do it. So we thought we would just walk through some of the basics today. Murs is the one who helps all of our clients with this particular topic. So in this particular podcast, I’m going to just really throw the questions to him and let him answer them. So for those listening that maybe are not familiar with an I bond or what that even means, can you, first of all Murs just tell us what is an I bond?
Murs Tariq:	Yeah. So like you said, it’s been in the headlines quite a bit. So understanding what it is, where it comes from, how it works is going to be huge. An I bond, it’s issued by the government. So you buy it by the government, it’s backed by the government and it is a bond that is going to earn some interest. If you want to have a trigger in your head, the letter I pretty much stands for inflationary. So the rate, and we’ll talk about that as well, it’s going to be moving a little bit. So if you think about where inflation is today, inflation is very high. Highest it’s been in decades. So that’s why, again, that this I bond concept has come into light quite a bit in the media, in the headlines and everything. So we’ll get into a little bit more on it.
Radon Stancil:	Okay. So now let’s just talk about this idea of… Well, I’m going to ask this one first. What is it that’s out there in the news that’s making people say oh my goodness, I want to go talk about this I bond?
Murs Tariq:	So the headlines are you should go buy an I bond because it’s paying right now 9.62%. I’ll talk a little bit about how the interest rate works, but what has people worried right now is, like you said earlier, the market is being very difficult this year. Although, we’re coming off of three really strong years. So we can’t forget about those, but 2022 has been very difficult.
	On top of that inflation has really crept up in the idea of your normal spending, gas, groceries, all that. So everyone’s feeling the pressure of finding some way of making a return. So the I bonds have become attractive because one, it’s government backed and it’s a guaranteed rate of return that does move around a little bit. But it’s easy. All you got to do, it’s kind of like putting money into a savings bank and getting a 9.62% rate of return. So you could almost say it’s a no brainer. It’s not quite a no brainer and that’s why we want you to help you understand a couple of the caveats to them.
Radon Stancil:	All right. So now I hear a headline. I go okay, this sounds interesting. I want to go buy one. How do I buy it? What’s the process?
Murs Tariq:	I’ve had a lot of conversations with clients saying, “Hey, I heard about these I bonds, can you go buy some for my account?” The answer is no. An advisor cannot buy them for you. You have to buy them individually and you buy them directly through treasurydirect.gov. That’s a government sponsored website and I’ve been on it several times to do my own research. It’s very resourceful. It’ll walk you through every little detail that you want to know about I bonds, but you buy them electronically now is the idea. Obviously the government wants to get away from paperless as much as they can, as much as the rest of the world does.
	So essentially you create an account online and then that allows you to go purchase them through bank drafts. So you don’t get a paper bond like you could have imagined 30 some years ago you had these E bonds and E bonds and stuff like that. You’re not really getting the paper bond except for one instance, which I think is going to be a rarity. So in most cases, people are going to buy them through treasurydirect.gov. If you did want a paper bond, just for fun to have it and see it and feel and hold it, the only way to get that is through say on your tax return, you do get a refund. Instead of taking the refund in cash, you can elect and submit a form that says I’d Then the government will issue an actual paper bond. They both work the same. In my mind, I would think buy it online so it’s easy to keep up with and track rather than having a physical piece of paper in your hand.
Radon Stancil:	All right. So now let’s say I hear about all this. Okay, I know how to go do it. This sounds super exciting, high rate of return. I’m going to go put $100,000 in I bonds. Are there limits on what I could do?
Murs Tariq:	Yes and that’s the key here. So it’s not an end all to everyone’s worries about this market this year. The limit is $10,000 per person. So if you’re married, you can buy 10,000 for yourself. You can buy 10,000 for your spouse. You can actually buy 10,000 for if you have your kids as well. You can also gift 10,000 to as many people as you want. As you are gifting, just realize that you’re buying up their ability to buy their 10,000. So it’s not that you can gift your child 10,000 and then they can go buy 10,000 with their own money. Each individual can only get 10,000 per year. So again, that’s why I say it’s not a save all to what the market issues have provided this year, but it does help.Put 10,000 into an I bond and it’s going to earn about 9.62% right this moment.
	I want to come back to that too Radon, as to how the interest rate works, but there are limitations. So all kind of comes back to hey, this is going to help some, but we still got to have an investment plan, an investment strategy to take care of the rest of your money, the bulk of your money.
Radon Stancil:	Yeah. Well, let’s just go ahead and talk about that a little bit on the interest rate. ‘Cause you’re saying 9.62. How long is that 9.62? If you look at the current rate, how long is that guaranteed for? I mean, is that for the life of the bond or how long is the bond by the way? I guess when I buy this, this $10,000 bond, how long do I need to hold it in order to recognize the interest?
Murs Tariq:	Yeah. So the headlines are flashing 9.62% but what they don’t tell you is that this rate is going to adjust every six months. They adjust the rate, I believe in May and then again in October. So today it’s 9.62. Come October of this year it could go up or it could go down again, all based off of inflation. There’s two components to how the interest rate is derived. One is the fixed rate that the government is going to provide no matter what. Currently it just so happens the fixed rate is zero. They can move that around but right now the fixed rate is zero.
	The other component is the inflationary rate based off of the CPI. So right now inflation is high. So zero from the fixed plus high inflation, that’s where we’re ending up at that 9.62. So what I’ve been telling people is that it’s a good buy today, but five years from now, it probably very likely if the government does what they plan on doing and curbing inflation and bringing it back into some normalcy, probably that I bond is going to be paying somewhere in the two to 4% type of window potentially. So it’s not going to be a long term 9%. It’s going to go with wherever inflation is.
	Now for the short term does it make sense? Absolutely. It makes sense. It’s a good rate of return. So just one thing to think about there and understand that-
Radon Stancil:	So I’m sorry to cut you off, but how long do I have to hold it?
Murs Tariq:	Yeah. So as far as holding it, you want to… Now when we’re talking about, someone says I’ve got 10,000 in the bank does this make sense for me? The first thing I need to tell them is that you got to hold it for one year. Absolutely. You got to hold it for one year before you can cash it out. But what I’ve found is that the optimal time to hold it is really five years. So you want to kind of look at this as a five year CD or a five year investment where you’re really not touching it.
	So let’s say though, you have that emergency in year two, or year three or year four, and you needed access to that. You do have access to it, but kind go back and think about a CD. If you take money out of a CD early, what are they going to do? They’re going to take back some of the interest that you’ve earned. So with an I bond, if you cash out before five years, they’re going to take the last three months of interest as a penalty. So still not a big deal, but to make it the most efficient, you want to have it in your mind that you hold it for at least five years.
	You can actually hold it for up to 30 years and it’ll continue to earn interest over a 30 year window, basically off of again, inflation, wherever that rate is. So continue to earn interest. After 30 years, it stops earning. So at 30 years, you definitely want to cash it out.
Radon Stancil:	All right. So now you talked about the fact that we can have multiple people buy it and I could have it in my name. If I’m married, I can have it in my spouse’s name and my children’s name. You talk about how easy it is to go buy it. How easy is it to sell it? Do you go back and do the same way?
Murs Tariq:	Yep. Yep. It’s just as easy as that. You go back on and you redeem them through the portal that treasury direct has set up for you. In a previous life I worked at a bank and in that time I remember people bringing in EE bonds and I bonds all the time and they would come in to bring them to the bank to cash them out. That would be a little bit of a headache for both sides of the party but now that’s all kind of gone away. Now it’s very easy to cash them out, because it’s all done digitally for the most part.
Radon Stancil:	All right. So final question, how is it taxed, the interest that I earn on this particular I bond?
Murs Tariq:	Yep. So the bond is federally issued. So one nice thing is that, in most cases, it is not taxed on the state side. So it’s basically tax free on the state side. There are some caveats to that very specific ones, but for most people it’s going to be tax free on a state income tax level. But it is federally taxable.
	Now, what type of tax are you going to have on it? So let’s say that you put in 10,000 and you hold it for whatever, for however long. Let’s just say it goes to 15,000 by the time that you cash it out. The 10,000 is what you put in. So that’s just kind of a return of capital. There is no taxes on that. The 5,000 is growth or gains that are taxed as interest or ordinary income. So in this arena, you do not get long-term capital gains treatment. You’re going to get taxed at ordinary income.
	So if your income for the year is 100,000 and now you redeem the bond in that year and you have a $5,000 gain, now your income for the year is 105,000. So it’s ordinary income, which means you’re taxed at whatever rate you’re going to fall into. So another thing to keep in mind as you’re thinking about, when would I cash this out?
Radon Stancil:	All right. Excellent. We hope this has been helpful to you to know a little bit more about I bonds. I know we went through a lot. Just if you’re thinking about man, I forgot what you said on this. I got to get hit replay, you can also get it in writing. We have a blog article written on this topic of I bonds. You just go to our website, which is POMwealth.net. Go to the blog page. We have a nice article that’s written on this particular topic.
	If you think you’d like to talk to us on the website also at the top right hand corner is a schedule call button. Our calendar will come right up. You can get on the phone with us. We’ll glad to hop on a complimentary, no obligation, 15 minute phone call with you and we’ll answer any questions that you have. Thank you very much for listening. We’ll talk to you again next Monday.