Ibonds loop hole

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Legal Loopholes For Buying $75,000 Of New 6.89% I Bonds

 

• PAUL KATZEFF
•  
• 07:00 AM ET 11/17/2022

Treasury I bonds weren't just a good deal in October. They were a great deal with their 9.62% interest rate. And now it's time for you to consider investing in the Treasury's latest attractive I bond.

The new bond's 6.89% interest rate is the fifth highest ever on Series I bonds since their 1998 debut.

And the generous size of the rate was somewhat surprising to experts.

I Bonds: Website Crashed

The old I bond's fabulous 9.62% annual interest rate was the highest ever on I bonds. But it is no longer available.

The 9.62% rate was so enticing that the TreasuryDirect.gov website crashed under the weight of investors trying to buy the debt. Sales in October alone set a record. Single-day sales of $979 million on the deadline day of Oct. 28 nearly equaled cumulative sales of $1 billion from 2018 through 2020.

Full-month October sales nearly topped $7 billion.

You can buy the new I bond with its 6.89% rate from now through April.

How These Bonds Work

The reason I bonds have relatively high interest rates is that they are pegged to the inflation rate. The Treasury sets new rates every six months using inflation data.

As many Americans are painfully aware, inflation has soared to nosebleed heights in the second half of 2022. "Even though inflation started to moderate in late summer, it remained elevated," said Ken Tumin, founder and editor of DepositAccounts.com, a bank account comparison site.

Technically, these bonds consist of two components, each paying its own yield. One is tied to inflation. That rate resets every six months. The new rate tied to inflation is the third highest ever, Tumin says.

The other rate, now 0.40%, is fixed for the 30-year life of the bond. "The Treasury raised the fixed rate to 0.4%," Tumin said. "That was a little more than I had expected."

The composite rate equals 6.89%.

How To Buy I Bonds

Each calendar year, you can buy an electronic bond worth up to $10,000. In addition, you can buy up to $5,000 worth of paper I bonds. But the only way you can buy paper versions is by using tax refund money. You can do that when you file your taxes, using IRS Form 8888.

Later, you can convert a paper bond to an electronic one.

Still, as IBD explained in an earlier report, a married couple can use legal loopholes to plow up to a total of $75,000 into these bonds.

Here's how: each spouse buys $10,000 worth of I bonds directly. Each spouse must have their own TreasuryDirect account.

If you are a dual-career couple who each run a business, your firms can buy each of you another $10,000 worth. If your financial plan calls for creating two living trusts, those entities can each buy one of these Treasurys for each of you.

Living trusts' main purpose typically is to transfer property to loved ones after your death.

Meanwhile, let's say you have three children. You can buy up to $5,000 worth of bonds for each of them. Each child must have their own TreasuryDirect account. That's another $15,000. As a family, you'd be investing $75,000 in I bonds in a single year.

But remember the calendar-year limits. If you bought up to any limits of the 9.62% rate bonds, you must wait until January to buy the new 6.89% bonds in those same accounts.

Beware Of The Risks

You can cash in an I bond after 12 months. But if you cash one in before it is five years old, you will forfeit the last three months of interest.

The new 6.89% rate will only last six months before Treasury resets it.

Still, I bond rivals are losing luster as inflationary pressure appears to abate.

Rival Investments

Rivals include 5- and 10-year Treasury notes. "We are already seeing yields fall for the 5- and 10-year Treasury notes after news came out about the October consumer price index (CPI)," Tumin said.

Tumin said, "Even if inflation falls and the May 2023 I bond inflation rate is lower, the annual return will likely be very competitive to today's safe alternatives such as one-year Treasury bills and one-year certificates of deposit (CDs). Today's highest one-year CD rate is currently only 4.84% annual percentage yield (APY)."

If inflation eases, locking in today's I bond rates will be even more valuable. "I Bond rates will only look attractive when inflation is high," Tumin said.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best mutual funds.