Experts answer three tricky questions about Series I bonds

Demand for Series I bonds, an inflation-protected and almost risk-free asset, has skyrocketed as investors seek refuge from rising prices and stock market volatility.

While annual inflation rose by 8.6% in May – the highest rate in more than four decades, according to the U.S. Department of Labor – I bonds are currently paying an annual rate of 9.62% through October.

It is particularly attractive after a rough six months for the S&P 500, which has fallen by more than 20% since January, limiting its worst start from six months to a year since 1970.

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Indeed, since the annual I-bond rate rose to 7.12% in November, 1.85 million new savings bond accounts have opened until June 24, according to Treasury officials.

“I bonds are a great tool for both cash reserves and investment portfolios,” said certified financial planner Byrke Sestok, co-owner of Rightirement Wealth Partners in Harrison, New York.

Supported by the US government, I bonds will not lose value. And if you feel comfortable not touching the money for 12 months, the current rate “dwarfs” other options for cash reserves, he said.

Yet, there are nuances to consider before stacking money in these assets. Here are answers to some of the more difficult I-bond questions.

1. How does the interest rate work on I bonds?

I bond yields have two parts: a fixed rate and a variable rate, which changes every six months based on the consumer price index. The U.S. Department of the Treasury announces new rates each year on the first business day of May and November.

With inflation rising over the past year, volatile rates soared, rising to an annual rate of 7.12% in November and 9.62% in May. However, the initial six-month rate window depends on your date of purchase.

For example, if you bought I bonds on July 1, you will receive the annual rate of 9.62% until December 31, 2022. After that, you will start earning the annual rate announced in November.

2. How do I pay tax on I mortgage interest?

While I avoid mortgage rates state and local taxes, you’re still on the hook for federal taxes.

There are two options to cover the account: report interest on your tax return each year or defer it until you redeem the I mortgage.

While most people procrastinate, the choice depends on several factors, explained Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

All of these decisions come back to the ultimate goal of this investment.

Tommie Lucas

Financial Advisor at Moisand Fitzgerald Tamayo

For example, if you choose to pay tax on your I bond interest each year before receiving the proceeds, you will need a different source of income to cover those levies.

However, if you have earmarked those funds to pay for education expenses, the interest is tax-free, so it does not make sense to pay levies annually, he said.

“All of these decisions come back to the ultimate goal of this investment,” Lucas added.

3. What happens to my I mortgages when I die?

When creating a TreasuryDirect account to buy I bonds, it is important to add what is known as a beneficiary name, by mentioning who inherits the assets when you die.

Without this designation, it becomes more challenging for loved ones to pick up the I bonds, and may require the time and expense to go through the trial court, depending on the I mortgage amount, Sestok explained.

“Personally, I make sure my clients do it right in the first place,” he said, explaining how adding beneficiaries in advance can avoid headaches later on.

However, if you are setting up an account without a beneficiary, you can add one online by following the steps outlined here at TreasuryDirect. You can call support with questions, but they are currently experiencing “higher than usual call volumes,” according to the website.

With a named beneficiary, I-mortgage heirs can continue to hold the asset, cash it in or have it issued in their name, according to Treasury Direct.

The accrued interest up to the date of death can be added to the original owner’s final tax return or the heir’s filing. Either way, the beneficiary can decide whether or not to continue to defer interest, Lucas said.

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