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Klingman Insights

I Bonds - a tool against high inflation

May 4, 2022

With inflation rates we have not seen for decades, an investment option not frequently used by high net worth individuals in recent years has become increasingly attractive. Specifically, Series I savings bonds (“I bonds”) are a type of bond offered by the US government that is designed to protect cash holdings against inflation. Unlike other government bonds that have fixed interest rates, the interest rate on I bonds varies with inflation, thereby protecting cash in high inflation environments like we are currently seeing.  The current interest rate for I bonds is 9.62%. (The rate, which adjusts every 6 months, had been 7.12% through April.)

The following Forbes article provides a useful overview on them: https://www.forbes.com/advisor/investing/what-are-i-bonds/ 

A couple of key aspects to highlight:

  • Each individual (or trust/corporate entity such as an LLC) can purchase up to $10,000 in I bonds per year
    • One can also purchase an additional $5,000 in I bonds using a portion of their federal tax refund (if one exists). To do so, work with your accountant to file the necessary paperwork (Form 8888).
  • I bonds must be held for at least one year
  • If I bonds are held for more than one year but less than five years, the last three months of interest is forfeited
    • The bonds can be cashed out at any time after five years without penalty
  • Interest on I bonds is exempt from state and local taxes, and exempt from federal taxes if used for qualified higher education purposes

For those of you who are interested in purchasing I bonds, you must do so directly with the US treasury. (Unfortunately, we can’t do it for you.)  You can follow these steps:

  • Go to: https://www.treasurydirect.gov/indiv/myaccount/myaccount_treasurydirect.htm
  • Log In to your account if you have an existing account or click “Open an Account”
    • You will need your driver’s license and bank account/routing information handy
  • Then follow the instructions to set up your account and purchase the I Bonds
  • We strongly suggest you write down and save your Account Number as the retrieval process can be cumbersome