US Treasury Series I Savings Bonds

US Savings bonds are bonds you purchase directly from the US Treasury.  They are a little different from buying ordinary treasury bonds, in that you buy them directly from the treasury, and you cannot sell them to anyone else — you hold them until you redeem them, again, directly from the treasury.

This has some interesting consequences.  Since you can’t sell them to anyone else, but you can redeem them, this means that they cannot go down in value.

There have been a variety of series of US Savings bonds over the years, and they’ve had some different terms regarding how long they earn interest, how you hold them, and how the interest is computed.  Right now, only two versions are still available, Series EE bonds and Series I bonds.  We are going to focus on the Series I bonds here, which we may also refer to as “I-Bonds”.

Series I bonds are inflation-protected bonds.  When you buy bonds, you are loaning money out.  If there is a lot of inflation, when you get paid back, the money you get paid back may be worth less than you started due to inflation unless you get enough interest to make up for the inflation.  Series I bonds do exactly that — the interest you earn is tied to the inflation rate.

I-Bonds earn interest computed with two elements.

One is a fixed-rate which is set when you buy the bond and applies for the life of the bond without change.  Unfortunately, the fixed-rate available now is zero.  Since I-Bonds were first introduced, the available locked-in fixed-rate has been as high as 3.6%, but it’s been zero on and off for a while now.

The other piece is the inflation component.  And while the fixed-rate piece is locked in for the life of the bond, the inflation component gets updated every six months.   It’s reset every November and May.

Right now, since inflation heated up recently, the inflation adjustment component of the interest you earn on an I-Bond is over 7 percent!  Read that again.  Over seven percent.  Now, of course, this is an annualized rate, and it’s only locked in for the next six months.  But that still means that even if the interest rate goes down to zero six months from now, you’ve had 6 months to earn at more than 7%, guaranteeing no less than 3.5% over the course of the next 12 months.

That’s vastly better than any savings bank is paying now on cash.  And it’s vastly less risky than anything else which has recently been paying more (like, for example, stocks — which can easily lose money).

For more information about how the interest is computed, read this:  https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#rate

Note that if inflation goes negative – these will still never lose money.  They may earn zero, but they will never earn a negative rate.

But wait, there’s more!

The interest you earn is US Treasury interest.  It’s free of state and local income taxes.  In a high income-tax state like, say, California, this is a big deal!

And it gets better than that. The interest, while taxable, doesn’t get realized — recognized for taxes — until you redeem the bond (you may opt to pay annually, but there’s rarely a reason to do so). That means that these are effectively tax-deferred like an IRA. The interest you earn compounds along the way with no taxes due until the end.

[There are some other benefits, but we’ll leave this alone here — that’s more than enough!]

So what’s the catch?

There are a few things to watch out for.

(a) Once you buy an I-Bond — you may not redeem it for 12 months. It’s not like a CD where you can redeem and pay a penalty or something. You are absolutely stuck with it for a year. (And remember — the interest rate is going to adjust 6 months from now, so you may earn a lot less over the course of that year than the rate you are locking in now — see above).

(b) If you redeem it after 1 year, but before 5 years — you will forfeit the interest you’d earned in the last three months you held it.   This is not a big deal if it’s paying (or has paid) a good rate before that.  If you buy them now, and the rate goes to zero six months from now, then 12 months from now, the first chance you get to redeem it, you’ll still have earned > 3.5% over the course of the year — and the three months of interest you forfeit at the end?  They were zero anyway.  That’s the worst case.  Much more likely, of course, that inflation won’t go to zero (or negative) and you’ll keep earning decent money, at least as  much as you’d get at a bank.

(c) You may only buy $10,000 worth of them per person per year.    Okay, it’s a little more complicated than that, as you may buy some in the name of a trust, in addition, if you have a trust set up.  And you may buy up to $5000 more with your tax refund if you’d overpaid your taxes.  But for most people, it’s $10,000/person/year.    The good news is that you can buy $10,000 worth in December and another $10,000 worth in January.  But if you have a large portfolio, there’s just no way to get a significant portion of your bond allocation into these.

(d) You have to buy them (other than the tax refund ones) via the US Treasury Direct website.  And it’s kind of awful.  The password system doesn’t let you type your password – you have to point and click on the letters of the alphabet to type it in.  You can only link in one bank account.  And if you want to change the bank account you’ve linked in, they make it incredibly difficult.  So make absolutely certain that whatever bank account you link in is one you plan on using, you know, forever.  And double and triple check it — they don’t do a test deposit to verify the account — get that routing number and account number right.

So how do we do it?

Go to https://www.treasurydirect.gov

Click on “Open an Account” (this is on the top right of the page):

Click on “TreasuryDirect”

Click on “apply now” (bottom of the screen). Make sure you have the information noted here — SSN, bank info, and you’re prepared to remember your security information.

Choose an account type:  (Most folks want “Individual” — but if you’re trying to exceed that $10k limit, you may also open additional accounts – entirely separately – in one of the other categories).

Fill in all the appropriate information.

Make sure to choose a password which isn’t impossible to deal with — remember, you’re going to have to enter it in the future by pointing and clicking on the letters/numbers/etc.  You cannot copy and paste it in, so those very complex passwords that password-generators make are not going to be very easy to deal with.  In theory, they put this point-and-click system in place for increased security, but in reality, it actually makes people likely to choose much worse passwords.  As I said, awful website.

Once you’ve done this — and triple checked your bank routing and account numbers and submit it — they will e-mail you your Treasury Direct Account Number.   Save that account number!

Now try to log in with that account number, and they will e-mail you a One Time Passcode.   You will log in with that — and the password you selected when you set up the account in the first place.

Anyway, now you’re in and may buy bonds.

Buying Bonds

Log back in, and click on BuyDirect at the top of the screen

Select “Series I”

Each bond has its own registration information.  The primary owner will be whoever’s account is being used to buy them, but you may add either a secondary owner or a beneficiary.   You may buy multiple bonds with different secondary owners or beneficiaries.   And you may *change* those things later.  

Anyway, this next screen is where you set up your purchase.  Source of funds will be your bank.  You may make a single purchase, automatic repeated purchases (ie. Monthly), or a series of specific purchases.   It may make sense to purchase multiple smaller units rather than a single $10,000 purchase because you can, should you choose to, cash them out in those smaller increments.  Perhaps buy 5 $2000 bonds rather than a single $10,000 one.

That’s it.