Series I Bonds - The Perfect Stocking Stuffer?

Originally posted on December 14, 2021.

Why this savings bond might be the perfect stocking stuffer

As you know, I don’t often talk about bonds, especially in the recent era of extremely low yields. But thanks to the recent high inflation numbers brought on by strong demand and tight supply, a special type of U.S. savings bond is one of today's hottest investments. It’s hard to believe, but it's true. Just last month, investors spent $1.312 billion on one particular type of savings bond -- the Series I savings bond. The demand was likely higher, but the US Treasury limits the amount people can buy.

Bonds are key to a balanced portfolio. They are especially important as you near retirement because in general, they are less risky than stocks. But owning a regular fixed-income bond is tricky right now. For one thing, inflation is starting to tick up.

Rising inflation is a problem for fixed-income investments. For instance, investors will end up losing money on a regular ten-year bond with a 1.9% interest rate if the inflation rate is higher than 2%. Series I bonds, however, offer protection against rising inflation. And there is probably no time better to own a Series I bond than now.

Right now -- and through April 20, 2022 -- investors can get a Series I bond paying 7.12% interest. Better yet, if inflation continues to rise, this bond's interest payments will also rise. While there is an annual limit of $10,000 per person, if you act before New Year's, an individual can purchase up to $20,000 worth of Series I bonds in less than a month.

The best source of information is on the US Treasury's website. Meanwhile, here are some helpful details:

Yield: I Bonds bought between now and April 30, 2022 will start with an annual yield of 7.12%. Every six months, the yield will be adjusted based on a combination of the prevailing fixed rate and the inflation rate.

Limits: One person can invest a maximum of $10,000 per calendar year in Series I bonds. There is no limit on household ownership, so each person within a household can purchase up to $10,000. Also, since the limit is based on a calendar year, each person can purchase $10,000 worth of the 7.12% Series I bonds in December and another $10,000 in January. For those with lower investment amounts, Series I bonds can be bought in denominations starting at $25.

Maturity: Series I bonds mature in 30 years, but they can be redeemed after 12 months. If redeemed between one year and five years, investors will have to forfeit three months of interest. Bonds that are redeemed after five years retain full interest.

Taxes: Interest on the Series I bond is not taxable at the state level (for those of you non-Texans who have a state income tax). It is, however, taxable at the federal level. Taxpayers have the option of paying taxes on the interest annually or deferring the taxes on the total interest when the bond is redeemed or matures. So, if you are working now, you may want to defer the taxes on the total interest payments until after you retire.

Availability: The Series I bond is not offered by brokerage firms or banks. They must be purchased directly through the US Treasury. But a 7.12% bond is probably worth opening one more account.