Typically, when clients invest in U.S. Series I Bonds they know only the yield for the first six months on these risk-free, state income tax-free, inflation-linked instruments. Their rate changes twice yearly.
But Consumer Price Index data for March laid bare the interest that new I bonds purchased by April 28 will accrue over the next 12 months: an annual rate of 7.12% for the first six months, followed by 9.62% the next six. When you crunch the numbers with I Bonds’ semi-annual compounding, clients can earn 8.54% the first year. That’s probably far more than they’re getting from bank products.
“If you’re an advisor who’s interested in adding value to your clients, many of them have short- and medium-term money and I Bonds are a good deal for those folks” right now, said Jeremy Keil, a financial planner with Keil Financial Partners in New Berlin, Wis.
I Bonds must be held for at least a year; interest is paid on redemption. Designed to keep pace with inflation, these securities are not without drawbacks. However, concerns about them may be overblown, at least at this juncture.
One knock is that when I bonds are redeemed within five years of purchase, their last three months of interest is forfeited. But at the rates available now, bailing out after a year would leave the client with an annual return a little north of 6% after the interest penalty, beating current rates on 12-month certificates-of-deposit by a country mile.
A Bona Fide Option For Client Cash
Affluent clients, and many of their advisors, often dismiss I- Bonds because of their calendar-year limit on purchases: $10,000 in electronic bonds purchased through an account set up at TreasuryDirect.gov, plus up to $5,000 in paper bonds using a federal income tax refund. But this is not as constricting as first appears.
With a couple, each spouse can establish an account and buy $10,000 of electronic bonds. A separate account for their revocable living trust can purchase another $10,000. (Use a spouse’s Social Security number for the trust account’s taxpayer identification number.) As of April 7, 4.67% of outstanding electronic I Bonds were owned by trusts, a spokesperson at the U.S. Department of the Treasury’s Bureau of the Fiscal Service said in an email.
A client’s corporation or partnership can purchase $10,000 in electronic I Bonds, too.
Bonds bought for family members count toward their annual purchase limits, not the buyer’s. It’s easy for clients to go into their TreasuryDirect.gov account and buy bonds as gifts, Keil says. “We’ve had people do that,” he said. Recipients need to open an account to have the bond delivered to them, he added.
Uncertainty Mitigated
For investors, the variable-rate nature of I Bonds can be unsettling given the one-year minimum holding period and the loss of interest on redemptions within five years, critics say.