Act Now: Earn 9.62 Percent Tax-Deferred
From now (today) through October 2022, you can buy Series I Bonds that pay 9.62 percent interest. And you receive that rate for six months from the time of purchase.
What happens after that? On November 1, 2022, the U.S. Treasury Department sets a new six-month rate equal to the ﬁxed rate (currently zero) plus the Consumer Price Index inﬂation rate.
The interest you earn for the ﬁrst six months gets added to the principal, and you earn interest on that interest during the next six months (think compound interest).
Sounds too good to be true. There’s a trick, right? Not really, but the government keeps your money, both your principal and your interest, for at least one year.
The Mechanics: How it Works
It works like this: You are buying a 30-year bond. The interest rate changes every six months. You can cash out anytime after one year, but if you cash out before ﬁve years, you have to forfeit three months of interest (no big deal).
You don’t pay taxes on the interest until you cash out. You get the compounding effect tax-free. It’s like a Roth IRA without age limits and penalties.
Key Point: You can’t lose the money you invest or the interest you earn, other than the three months’ worth if you cash in before ﬁve years.
When you do cash in, you pay federal income taxes on the interest, but you don’t pay state, county, or city income taxes.2
It is possible (albeit unlikely for many of you) to avoid taxes on the interest altogether if you use the monies for qualiﬁed higher education expenses.
Okay, So What’s the Downside?
You can’t buy more than $10,000 per year, although if you buy from Treasury Direct and also utilize your tax refund, you can acquire $15,000 of bonds per year.
If you’re married, your spouse can buy $10,000 of bonds, so now you’re up to $25,000 per year.
Now, let’s add in your corporation or many corporations. Such entities can purchase up to $10,000 of such bonds per calendar year.
Example: Sam, his spouse, and his two corporations are hot for the 9.62 percent of tax-deferred interest. He has not yet ﬁled his 2022 tax return, which shows a tax refund. With Sam, his spouse, and his two corporations, Sam can buy $45,000 of I bonds in the calendar year 2022.
He can do the same during the calendar year 2023.
The major downside to the bonds is that you cannot buy more than the annual limits above. There’s no overall limit, just the annual limits.
If you buy $10,000 of Series I Bonds now, you earn 9.62 percent interest for the ﬁrst six months. The Treasury Department adds that interest to your principal amount, so you earn interest on your interest for the next six months.
Let’s say inﬂation stays as it is and you earn 9.62 percent on your Series I bond for the full year. At the end of the year, your bond has a principal balance of $10,985.
If you cash out, you forfeit three months’ interest. Three-quarters of 9.62 percent is 7.22 percent (still a great risk-free investment).
The Series I bond is based on inﬂation. So if inﬂation drops to zero, cash out that bond. Meanwhile, ride this inﬂation wave. And remember, your Series I bond cannot go down in value. So that $10,985 principal balance never goes down. Deﬂation can’t hurt it.
For a limited time, up to October 2022, you can buy Series I Bonds that pay 9.62 percent interest. For this, you receive that rate for six months from the time of purchase.
After that, on November 1, 2022, the U.S. Treasury Department sets a new six-month rate equal to the ﬁxed rate (currently zero) plus the Consumer Price Index inﬂation rate.
The interest you earn for the ﬁrst six months gets added to the principal, and you earn interest on that interest during the next six months (think compound interest, the tenth wonder of the world).
The Series I bond is based on inflation. So if inflation drops to zero, cash out that bond. Meanwhile, ride this inflation wave. And remember, your Series I bond cannot go down in value. If your $10,000 I bond earned $985 in interest, the new principal balance is $10,985 and that principal balance never goes down. Deflation can’t hurt it.
If you have questions, need clarity, or need help determining what’s important to pay attention to with Series I Bonds to help retain or maximize your gains, please contact us at Morris + D’Angelo. This is our Expertise!
At Morris + D’Angelo, we believe that Tax Optimization is one of the most empowering and responsible things you can do to protect your growing financial assets. Tax optimization looks at a multi-year approach to minimizing tax costs. Tax avoidance is integral to tax optimization.
Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
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