I-Bonds

I-Bonds are a bond offering from the US Treasury. Effectively, it gives citizens the option to purchase government debt at a reduced interest rate that they’d otherwise have to pay. It’s a win win!

Pros & cons of I-Bonds (tl;dr)

Pros

• Automatically adjusted for inflation
• Tax deferred interest
• Fixed-rate is locked (this is a pro in a decreasing rate environment)
• Government backed
• Free of state & local taxes
• Can use the proceeds to pay for qualified educational expenses tax free
• insert “I’m doing my part” meme Helping the government save money on their debt

Cons

• Limited annual purchase amount ($10k/year/person)
• Account management is a nuisance
• Fixed-rate is locked (this is a con in a rising rates environment)
• Forfeiture of 3 months interest if exchanged prior to 5 years of ownership
• Cannot exchange within a year

I-Bond Rates

The way I-Bond rates are determined is two-fold: a fixed rate (currently 0.40%) and an inflation adjustment. The inflation adjustment accounts for changes to the CPI. This is the benefit of an I-Bond!

As a result of the combination of the two rates, you are able to hedge against inflation, while also (generally) earning additional interest. These bonds adjust every 6 months, so over the 30 year lifespan of the bond, you are unlikely to be outpaced by inflation. This makes for a great emergency fund account, as the cost of your day-to-day expenses are likely increasing with inflation.

Buying I-Bonds

The process of purchasing an I-Bond is a bit of a hassle, since you need to have your identity verified after opening a treasurydirect.gov account, which involves documents being verified by a medallion signatory. However, once you’ve done so, you can purchase up to *$10,000 per year per individual.

You can also, technically, if you really wanted to, overpay your taxes by up to $5,000/yr/person and get your refund in I-Bonds.

One thing to note, when you make an I-Bond purchase, you should be aware that you have to exchange the full value of the purchased bond. If you wanted to buy $10,000 you could buy one bond for $10,000, or 10 bonds for $1,000 each. The Treasury only cares about the dollar amount, not the number of bonds. Buying more bonds at a lower amount per bond gives you higher flexibility when it comes to cashing out your bonds.

Interest accrual, exchange, and taxation

Interest is accrued every 6 months, but is compounded daily. This means your bond will be the same value from one month to the next, until the 6th month where the entire 6 months of interest is added to the value of the bond.

Bonds will earn the same fixed rate for 30 years, and are allowed to accrue without taxation for that entire time period. When you exchange an I-Bond, a 1099-INT is produced (sent at the end of the year) accounting for the interest earned from when it was purchased until its maturation/exchanging. Given that interest is added to the value of the bond, and not issued as cash, this defers the taxation until the exchange.

If your I-Bond reaches full maturity, it is automatically converted into a non-yielding bond. You should re-invest/withdraw this money as it is not yielding any return.

Given the ability to exchange early, without penalty, past 5 years, it gives some level of control as to when you “realize” the interest earnings. This may help in tax optimization, as you can time your interest taxes with a low income year.

Evan’s bookmarklet for not having to use the “Virtual Keyboard”

If you don’t want to use the treasury’s security theater keyboard, you can use the following bookmarklet to enter your password into a browser alert, and it’ll submit that password on your behalf. This is the full script, so you can see I’m not stealing your information :)

javascript:(function() { const input = document.querySelector('.pwordinput'); input.readOnly = false; const pwd = prompt('Enter your password', ''); input.value = pwd; document.querySelector('[value="Submit"]').click(); })();