Most people are still new to investing in I-bonds, and so it’s not surprising that they have a lot of questions about the basics. As a new year begins, the situation is even more complicated by strategy. Should you buy now? Should you wait? Should you cash in I-bonds you bought last year or the year before?
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Here’s the top 10 from our mailbag full of questions about I-bonds.
I purchased my first I-bond in June 2022. Can I buy my second I-bond now or do I have to wait one full year (June 2023) to buy my second?
You can buy up to $10,000 worth of I-bonds per individual each calendar year, so the new calendar year reset on Jan. 1, opening up purchases again. The one-year time frame comes into play only once you purchase. You must hold the I-bonds you bought in June 2022 until at least June 2023 before you could cash them in, but note that if you do redeem them before five years, you lose the last three months of interest.
Last year I opened a TreasuryDirect account and deposited $10,000 in I-bonds. Can I deposit for this year in the same account?
Yes, you can log in to TreasuryDirect.gov and purchase new I-bonds this year in the same account. You’ll see all of your holdings displayed in your account summary.
Is it possible to purchase and/or hold these bonds through a broker such as Vanguard or are we limited to purchasing through TreasuryDirect.gov?
While you can purchase Treasury bonds and TIPS through a brokerage, you have to have an account at TreasuryDirect.gov for I-bonds and purchase and redeem them directly from the government. The website can be a little hard to use, so have patience.
I bought a $10,000 I-bond in November 2021. What interest rate does this I-bond earn if I do not redeem it this year and possibly will not redeem it for a few more years? Where does one find this information?
The I-bond interest rate can be confusing, because it changes every six months, in November and May. The rate is composed of two parts, an inflation-adjusted rate and a fixed rate, and the listed rate is a combination of the two for a full year. So the rate in November 2021 would have been listed as 7.12%, but you actually only get half of that. So your I-bond started out earning 3.56% for six months, then 4.81% for the next six months, then 3.24%. No matter what month you buy in, you keep the initial rate for a full six months, then the subsequent rates each last six months too. All of this information will be listed on your account summary on TreasuryDirect.gov.
I am wondering what I have to do when my current I-bonds mature after five years? What happens if I do nothing?
Your I-bonds will stay in your TreasuryDirect.gov account and continue to earn interest until you redeem them, up to 30 years, and the tax will be deferred until you cash in. So if you do nothing, the account will just continue to grow. After five years, you’ll no longer lose three months of interest if you redeem.
Can I buy I-bonds with my tax refund if I’ve met the $10k annual limit?
There are several ways to go beyond the $10,000 per person/per year limit on I-bonds. If you’ve got a refund coming, you can request that it be paid in paper I-bonds, up to $5,000. You can also gift I-bonds to others such as children, grandchildren and nonfamily members, as long as you have their Social Security number. Spouses can even give gifts to each other. Recipients can redeem in any year they haven’t already met their own annual limit, so the gifts can sit unclaimed and accrue interest until the recipient is ready.
Is interest on I-bonds exempt from state and local taxes like the interest on other Treasury debt?
Yes, interest on I-bonds is exempt from state and local taxes, and the tax on the interest is deferred from federal taxes until you redeem the bond. If you redeem the bond for qualified educational purposes, you may be exempt from federal taxes as well.
How, exactly, is I-bond interest calculated and when is it paid?
The government has a complicated formula for calculating I-bond interest, but it effectively compounds in your account every six months, starting from the first day of the month you buy them. You’ll see the current value of your holdings in your account summary, but note that if you are within the five-year window, the amount shown does not include the last three months of interest, which would be the penalty for cashing out early.
Between now and the next rate change in May, when is the best time to purchase my next I-bond?
How are you feeling about inflation? If you want to wait for data, then you may want to wait until the middle of April, when the last inflation report that factors into the next I-bond rate will be available and you’ll have a greater sense of what it will be. Given the way things are going, it’s likely that the next rate will be lower than the current annualized 6.89% rate.
The focus is usually on the best time to buy…is there a best time to sell?
The best time to sell is really up to you. I-bonds keep earning interest up to 30 years, so you can just hold on to them and use them as an inflation-protected cash equivalent. After five years, they are fully liquid and you can just redeem any portion of your holdings by visiting your account at TreasuryDirect.gov and have the funds sent to your bank account.