Marc Scudillo Discusses Series I Bonds in Forbes Magazine
For those unfamiliar with Series I bonds, here are some quick facts about them:
- Series I bonds are a type of U.S. savings bond designed to protect the value of your cash from inflation; interest is calculated using a “composite rate” based on a formula containing a fixed interest rate and an inflation-adjusted rate.
- Today’s I bond yield far surpasses that of any other government-guaranteed interest rate available from any bank, brokerage or other insured source, according to a Forbes source.
- Series I bonds are exempt from state and local income taxes, but not federal taxes—unless they are used for higher education expenses. The owner is responsible for paying any tax due even if the bond was a gift.
- Investors can buy up to $10,000 worth of I bonds annually through the government’s TreasuryDirect website. You can purchase up to another $5,000 with your tax refund, upping the potential annual total purchase amount of Series I bonds to $15,000 per person. Minimum purchase amount is $25.
- I bonds earn interest monthly, though you don’t get that until you cash out the bond. You must own the bond for at least five years to receive all of the interest that is due, otherwise you forfeit the prior three months of interest.
- Electronic I bonds can be redeemed via the TreasuryDirect website. Paper bonds can be cashed in at a local bank.
- There is no secondary market for trading I bonds, meaning you cannot resell them; you must cash them out directly with the U.S. government.
Marc Scudillo, managing officer of EisnerAmper Wealth Management and Corporate Benefits LLC, likes I bonds for conservative investors. “Buying I bonds can be an attractive college savings strategy option as an alternative or in addition to 529 plans, which also grow tax free for qualifying higher education,” Scudillo says.
Series EE bonds are also sold by the U.S. government. Here are a few of their similarities and differences:
- EE bonds and I bonds are sold at face value, and they both earn interest monthly that is compounded semiannually for 30 years.
- Both I bonds and EE bonds may be redeemed or cashed after 12 months. If cashed during the first five years, you forfeit three months of interest payments.
- The interest rate on EE bonds is fixed for the life of the bond while I bonds offer rates that are adjusted to protect from inflation.
- EE bonds offer a guaranteed return that doubles your investment if held for 20 years. There is no guaranteed return with I bonds.
Scudillo suggests that investors should consider that series EE bonds are guaranteed to double over 20 years and I bonds offer no similar payout guarantee. If interest rates and inflation remain low, then EE bonds, with their guarantee to double in 20 years would perhaps be best. Given lower trending inflation rates over the last couple of decades it would take longer to double your money. However, should inflation increase substantially, then I bond holders would win out. Unfortunately, the only way to tell which bond earns more over time is in hindsight.
I bonds are an excellent choice for conservative investors seeking a guaranteed investment to protect their cash from inflation. Although illiquid for one year, after that period you can cash them at any time. The three-month interest rate penalty for bonds cashed within the first five years is minimal in light of the fact that they preserve your initial purchase amount and you would find similar penalties for early withdrawals from other safe investments.
I bonds are appropriate for the cash and fixed portion of most investment portfolios. Today, the I bond returns handily beat those of certificates of deposit (CDs). Parents might also consider accumulating I bonds to assist with future college payments.
Read the entire article here:
Marc Scudillo is the managing officer of EisnerAmper Wealth Management and Corporate Benefits LLC (www.eisneramperwmcb.com). He is a certified public accountant and a Certified Financial Planner™ and Certified Business Exit Consultant®.