Why You Should Think Twice About Series I Savings Bonds

With interest rates hitting 9.62%, Series I Savings Bonds have gone viral. There are several reasons you should think twice before you buy them.

This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.

Treasury Direct has no fraud protection.

Treasury Direct is an official government website of a government agency, but it’s not a bank. The usual consumer protections you get with a bank don’t apply.

The only protections you have are what the Treasury gives you. These protections don’t include fraud protection. You’re liable for any transactions made using your password.

I-Bonds are guaranteed to lose to inflation.

I-Bonds are supposed to keep up with inflation, but that’s not mathematically possible. That’s because you have to pay taxes on the interest.

Since the current interest rate is equal to inflation, you only get inflation minus your taxes. The only way you can match inflation is if you’re in the 0% tax bracket.

Note: I-Bonds do sometimes include a fixed rate plus inflation. In that case, you might beat inflation if your taxes are less than what you get from the fixed rate. However, the fixed rate is currently 0% and it hasn’t been above 0.5% since 2008.

The interest rate changes every six months.

When you buy Series I Savings Bond, you’re buying an investment with a variable rate. It’s similar to a savings account.

The rate changes every six months based on when you bought the savings bond. So if you buy in May, you get a new rate in November and then again the following May.

That may not seem like the end of the world, but the rates for the last 10 years have largely stayed between 0% to 2%. Sometimes, I-Bonds didn’t even beat savings accounts.

The current rates are very unusual. Yes, you can take your money out if rates fall, but you may not want to disrupt your finances for a temporary move.

You can’t cash savings bonds for 12 months.

You have to hold savings bonds for at least 12 months. There is no way to withdraw your money earlier even with a penalty.

If you’re holding money for a down payment on a house and might want to buy before 12 months if the market falls, you shouldn’t buy savings bonds. If you want to move your emergency fund into savings bonds, you won’t have access to it if you have an emergency before the 12 months is up.

There is a 3 month interest penalty if you cash your savings bonds in before 5 years.

If you cash in your savings bonds before you hold them for 5 years, you give up the last 3 months of interest.

So let’s say you held your savings bonds for 12 months and the average rate for that time was 6%. Your actual interest rate after the penalty would really only be about 4.5%. (6% x 9 months / 12 months).

You can only buy $10,000 in savings bonds per year.

If you have a large portfolio or a lot of money in savings and CDs, you might want to move it into I-Bonds at least temporarily while rates are high. You can only buy $10,000 worth of I-Bonds per calendar year.

If this is a small portion of your portfolio, the extra return might not be worth the hassle of opening another account.

It may be better to max out your IRA or 401(k) first.

If you aren’t already maxing out your IRA or 401(k), it may make sense to max those out instead of buying savings bonds. You can’t buy savings bonds in an IRA or 401(k).

There is no tax deduction for buying savings bonds like there is with a traditional IRA or 401(k). You also don’t get tax-free growth like you do in a Roth IRA or Roth 401(k).

You may not earn that much money for your trouble.

Let’s say the Fed gets inflation under control and the I-Bond rate goes back to zero next November.

If you bought the maximum $10,000, you’d end up with $481. That’s $10,000 x 9.62% x 6/12 months + $0 for the six months with a 0% rate. If you’re in the 37% tax bracket, subtract $177.97 in taxes for a final return of $303.03.

If you would have held the money in a savings account, CD, or bond fund, the benefit of buying savings bonds is the $303.03 minus what you would have got if you hadn’t moved your money.

Bank or broker bonuses may be higher.

You can routinely find bank or broker bonuses worth $100 to $500 or more if you move a few thousand dollars to a new account and keep it there for 1 to 3 months. The bonus is taxable, but doing this once or twice per year might get you more than maxing out savings bonds.

In addition, you don’t have to lock your money up for 12 months. You can withdraw it immediately if you give up the possible bonus. Once you get the bonus, you can move the money anywhere, including to a new bank with a new bonus.

Treasury Direct is difficult to deal with.

Treasury Direct is difficult to deal with and not just because they have an old website. Their security procedures often give people trouble opening new accounts, changing bank accounts, or getting back into their accounts if they forget their password.

In some cases, you may need to get a bank officer to verify your identity with a Medallion Signature Guarantee. Many banks are no longer willing to do this even for established customers since it means they take on financial responsibility for fraud in your Treasury account. If you get asked for this after you buy savings bonds, it could take months to be able to access your money again.

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