As the cost of bacon and other goods sizzles, more people want to protect their savings from getting burned to a crisp by inflation.
One simple move, which I wrote about this past summer as well, involves setting aside some money in inflation-protected savings bonds, known as I Bonds.
You’re likely going to hear even more about I Bonds come November when some startling new rates are expected to be announced.
But it’s not a bad idea to try to pick up some I Bonds by Oct. 28 to lock in some already solid rates – and set yourself up for an estimated 5.3% rate for a 12-month period. Here’s how you’d do it.
How to get a 5% rate
First, you need to realize that I Bonds issued this year from May through October now offer an annualized rate of 3.54%, good for six months, thanks to an uptick in inflation. This is a variable rate that will go up or down over time, and likely change every six months after the issue date of the bond.
The I Bonds issued this year from May through October have a fixed rate of 0% and then a variable adjusted rate for the next six months after buying the I Bond.
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On Nov. 1, the Treasury will announce the next rate for I Bonds and that’s expected to be around an annualized rate of 7.12% for a six-month period, according to savings bond guru Dan Pederson.
“So if I buy before Nov. 1 and get an October issue date,” he explained, “I will get an annualized rate of 3.54% for the first six months and 7.12% for the second six months.”
That’s an approximate total return of very attractive 5.33% for the year, experts said. To get to that number, you’d take half of the annualized 3.54% for the six months and half of annualized 7.12% for six months.
Yet, you’d want to pay attention to the I Bond rules. You cannot cash an I Bond until after you’ve held it for one year. And if you cash them before five years, you’d lose the previous three months of interest.
I Bonds earn interest for 30 years unless you cash them first.
David Enna, who has a website called Tipswatch.com, said he’d recommend that a person planning to hold the I Bond for five years or more try to buy in October.
“That’s no problem for someone who already has a TreasuryDirect account,” Enna said, “but for someone who doesn’t, the account should be opened as soon as possible.”
Over the next five years, Enna said, he’d expect that I Bonds would have a six-month variable rate that is less than 3.54%, which, if so, would mean the return for the buyer in November would lag behind the buyer in October.
But if a person is looking at this as a short-term investment, selling after a year, buying in November is a good choice, he said.
“If an investor can’t open the TreasuryDirect account this week, just buy in November and don’t worry about it,” said Enna, who has been tracking I Bond rates and auctions of Treasury Inflation-Protected Securities or TIPS since 2011.
“On Jan. 1, the purchase cap will reset to $10,000 per person per year, so that will be a second buying opportunity,” Enna said.
Based on the September inflation report, Enna anticipates that savers will see an inflation-adjusted interest rate of 7.12%, annualized, for six months for I Bonds purchased in November, or in six months for I Bonds purchased in October.
Enna said it has been “a dreary decade for inflation protection.”
“Suddenly, that’s turned around,” he said, “at least for I Bonds, which are very attractive and a hot topic right now.”
Why an I Bond vs. regular savings?
The argument for buying I Bonds is you’d get a better rate on some low-risk savings and keep up with inflation.
While consumer prices are edging up, banks aren’t exactly paying a great deal when it comes to interest rates.
The average yield on a one-year certificate of deposit is 0.15% as of Oct. 25, according to Bankrate.com. More aggressive promotional rates for those who shop around range around 0.55% to 0.75% based on Bankrate.com listings.
How to buy an I Bond
To get the current annualized 3.54% I Bond rate, you’d have to move quickly. I Bonds that are bought through TreasuryDirect online must be purchased before 11:59 p.m. on Oct. 28 to obtain a bond with an October 2021 issue date.
The customer must complete the transaction and actually arrive at the “Confirm Page” in the TreasuryDirect system before that cutoff time, according to John Rizzo, senior spokesperson, public affairs for the U.S. Department of the Treasury.
You can buy I Bonds online and hold them in electronic form via the TreasuryDirect.gov system. And that’s where you’d need to go if you’re look at buying I Bonds now. I Bonds are not issued at local banks any more.
If you want to buy savings bonds as gifts for the holidays, you must go through that electronic system, too. The person you’re giving the savings bonds to as a gift also must have an electronic TreasuryDirect account. You must know the recipient’s full name, Social Security number or Taxpayer Identification Number and the person’s TreasuryDirect number.
I Bonds aren’t easy to understand
Unlike a traditional one-year or five-year CD, you’re not getting the same set rate month after month. Rates on I Bonds can fluctuate every six months.
On Nov. 1, an updated variable rate will be announced and it would apply to new bonds bought from Nov. 1 through April 30, 2022.
The new rate beginning Nov. 1 would replace the 3.54% variable rate for I Bonds bought from May through October after those bonds turn 6 months old. This variable inflation-adjusted rate applies to I Bonds bought years ago, as well.
Again, you don’t lose a 3.54% annualized rate if you buy I Bonds before 11:59 p.m. on Oct. 28 and then the rate changes in November. Instead, a shift takes place six months after you bought that I Bond where you’d start getting the new rate, too, at a later date.
A bond issued in October, for example, would receive a new higher rate as of April 1, 2022.
Buying in November or after means that you only know what you’ll get for the next six months, not what you might get for a 12-month period. A new inflation adjusted rate is announced every May 1 and every Nov. 1.
How to buy I Bonds with a tax refund
There are two ways to buy I Bonds and it might be useful to know the second way if you’re looking to buy I Bonds later but not right now.
It is possible to get paper I Bonds in a limited way. The Series I Savings Bond is the only savings bond that can still be issued in paper form but you must buy those bonds through a program that’s connected to your income tax refund.
You’d need to file a Form 8888 when you file your tax return to allocate your federal income tax refund to U.S. Series I Savings Bonds.
In any single calendar year, you can buy up to a total of $5,000 of paper I Bonds using your federal income tax refund.
So you can theoretically buy up to $15,000 in I Bonds in a calendar year. To get to that maximum amount, you could buy up to $10,000 in electronic I Bonds in the TreasuryDirect system and up to $5,000 in paper I Bonds using your federal income tax refund.
Not everyone, of course, receives an income tax refund — or even anything close to $5,000 in an income tax refund in a year — so the actual total that individuals can buy in I Bonds will range significantly.
The minimum purchase is $25 for an I Bond bought online; and there’s a $50 minimum for one bought through the tax refund program.
Monroe-based Pederson said it’s not a bad idea to try to buy the I Bonds before 11:59 p.m. on Oct. 28, given that we already know what the first six months would bring and the likely rate for the next six months.
“So you have some solid numbers for the first year,” said Pederson, who operates a savings bond consulting firm and has a website called BondHelper.com.
Do you miss out completely?
While buying before the end of October can work for many, I Bonds are still a strong option if you don’t make a move until November or after.
You could buy I Bonds any time from Nov. 1 through April 30, 2022, to get that expected annualized rate of 7.12%, good for six months. The official rate will be announced Nov. 1.
Buying before the end of October, Pederson says, just gives you more assurance over the rate you’d get for 12 months.
If you buy I Bonds from November through April 2022, you’re starting out with a solid rate but then you’ll need to wait closer to May 2022 to find out what the next six months will bring.
No one knows, of course, if things will settle down or heat up come May 2022 when another six-month rate is announced.
Another point of interest to consider: You won’t pay state or local income taxes on the interest earned from savings bonds.
Interest earned is subject to federal income tax — plus federal estate, gift and excise taxes as well as any state estate or inheritance taxes.
In some cases, you may be able to exclude interest earnings from federal income taxes when the money is used to pay for higher education. But you need to pay attention to some complex rules. For example: “A bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or the child,” according to TreasuryDirect.
How much money can you make?
Some smaller savers, Pederson said, might not think it’s worth their time to set up an online account to buy I Bonds online.
If you’re only looking at setting aside $500 or $1,000 in I Bonds, the interest earned overall is still minimal — even though it’s far better than sitting in a checking account that likely pays no interest.
After all, a 5% rate on $1,000 amounts to around $50 in interest after one year.
If you’re looking at setting aside $10,000 or so, you’re looking at roughly $500 in interest after one year if you pick up 5% for the next 12 months.
But again, if you’re looking to diversify some savings and get an inflation hedge, the I Bond may be worth a second look — especially if you want to put high priced bacon on the table one day.