Rate resets on 9.62% interest, taxes, inherited assets: Experts weigh in on 3 tricky questions about Series I bonds

Series I bonds are an inflation-protected asset that is almost risk-free. This is because investors are seeking refuge from stock market volatility and rising prices.

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 a 9.62% annual rate through October.

That’s especially attractive after a rough six months for the S&P 500, which plummeted by more than 20% since January, capping its worst six-month start to a year since 1970.

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It’s almost like going to the DMV online: What do you need to know to buy Series I bonds through TreasuryDirect?

According to Treasury officials, 1.85 million savings bond accounts were opened since November when the annual I bond rate rose to 7.12%. 

“I bonds can be a great tool for both cash reserves as well as investment portfolios,” stated Byrke, a certified financial planner and co-owner at Rightirement Wealth Partners in Harrison.

I bonds are guaranteed to not lose value because they are backed by the U.S. government. He said that if you are comfortable with not touching the money for 12 month, the current rate “dwarfs all other options” for cash reserves.

However, there are some nuances you should consider before investing money in these assets. Here are the answers to some of your more difficult questions about I bonds. 

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

I bond returns are split into two parts: a fixed rate as well as a variable rate. This rate changes every six months based upon the consumer price index. The U.S. Department of the Treasury releases new rates every year on the first business day of May or November. 

Variable rates have increased due to inflation. They rose to a 7.12% annual rate in November, and 9.62% in May. The initial six month rate window will vary depending on when you purchased the property.  

If you buy I bonds July 1, you will get the 9.62% annual yield through December 31, 2022. After that, the annual rate will begin to accrue as announced in November.

2. How do I pay taxes for I bond interest?

Although I bond interest is exempt from local and state levies, you are still responsible for federal taxes.

There are two options available for paying the bill: you can either report the interest every year on the tax return or you can defer until the I bond is redeemed.

Most people will defer, but the decision is up to you, according to Tommy Lucas, a CFP, and enrolled agent at Moisand Fitzgerald Tamayo, Orlando, Florida.

All of these decisions all point back to the ultimate goal for this investment.

Tommy Lucas

Financial advisor at Moisand Scott Tamayo

If you choose to pay taxes on I bond interest each year before you receive the proceeds, you will need another source to cover those levies.

However, if those funds are used to pay for education expenses then the interest is exempted from tax. Therefore, paying annual levies makes no sense.    

Lucas said that all of these decisions are related to the ultimate goal of the investment.

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

When you create a TreasuryDirect Account to buy I bonds, you should add what’s called a beneficiary designation. This will name the person who inherits the assets in case you pass away. 

This designation makes it more difficult for loved ones to collect I bonds. It may also require the time and expense to go through probate court depending on the amount of the I bond, Sestok explained.   

“Personally I make sure my clients do things correctly in the first instance,” he stated, explaining that adding beneficiaries upfront can avoid headaches later.

If you do not have a beneficiary for your account, you can add one online. outlined hereTreasuryDirect. Support can be reached at TreasuryDirect with any questions. However, they are currently experiencing “higher call volumes than usual.” according to the website.

Named beneficiaries allow I bond heirs to continue holding the asset, cash in it, or have it reissued in your name. according to Treasury Direct

The accrued interest from the date of death can either be added to the original owners’ final tax return or to the heir’s file. Lucas explained that the beneficiary can choose to keep or defer interest in any way they like.

Source: CNBC

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