Money Trailguide, No. 11

Welcome to a new Money Trailguide. It is hard to believe that summer is fast approaching, but I am hopeful that the warming temps have you outside, finding new adventures.

I don’t typically focus this newsletter on specific money moves, but I have had several questions recently (and rightfully so!) on Series I Bonds and how they work. You will find details below, but let me know if this is something that you are interested in pursuing as part of your overall plan.

Included in this months newsletter is:

  • Quick hits…What I’m Reading
  • Making Lemonade Out of Inflationary Lemons: What You Should Know About Series I Bonds

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Happy Trails,

Joshua E. Self, CLU, ChFC, CFP®
Managing Partner

Quick Hits…What I’m Reading

  • The Code Breaker: Jennifer Doudna, Gene Editing, and the Future of the Human Race – Walter Isaacson…This is a giant of a book which is why I haven’t read much else this month.  However, it is fascinating!  I had heard of the CRISPR Cas-9 technology, but did not know the details.  Isaacson does a great job explaining the science in an understandable manner so that we can wrestle with the moral implications alongside the scientist.  I highly recommend this one as a summer reading.
  • Big Up, Big Down Days – The Big Picture, Barry Ritholz…Ritholz is a finance guru and has an ability to parse the noise and see the facts within the data that many other miss.  This link is a quick read but one that I recommend we all read a couple of times as a reminder that big up and big down days are normal.  In fact, they historically cluster pretty close together which makes them even more dangerous if one loses their nerve and tries to shift directions in the middle of such movement.   If you’re paying attention to the stock market right now, you should spend one minute to read this. 
  • NASA ‘Holoported‘ a Doctor onto the International Space Station CNET, Monisha Ravisetti….this is not from the latest Star Trek movie!  NASA successfully teleported flight surgeon, Dr. Josef Schmid, onto the ISS on October 8, 2021.  As this technology evolves and improves, it opens a whole new kind of future for the human race.

Making Lemonade Out of Inflationary Lemons:
What You Should Know About Series I Bonds

Is rising inflation souring your financial plans? As you may have heard us mention in the past, protecting the bulk of your wealth is mostly about building and maintaining a well-structured investment portfolio with a few anti-inflation elements. Outside of your core portfolio, there is also a potentially sweet deal for turning some of inflation’s lemons into lemonade. We’re talking about U.S. Series I Saving Bonds (“I Bonds”).

I Bonds are not a cure-all for inflation. And there is a thing or two that you must know about them before you decide whether to proceed. But as one of few holdings whose payouts are indexed to inflation, they may offer a refreshing haven for a portion of your emergency funds or similar cash reserves.

What Are I Bonds?

I Bonds are inflation-indexed savings bonds issued by the U.S. Treasury. Practically speaking, the interest you earn on your I Bond is the sum of two rates:

Fixed Rate + Inflation Rate = I Bond Composite Rate

The actual calculation is a little more complicated, but essentially ends up being the sum of these two rates.  The fixed rate is based roughly on prevailing economic conditions. The inflation rate is based on inflation, as measured by the Consumer Price Index for all Urban Consumers, or the CPI-U. However, the U.S. Treasury guarantees your I Bond will never be worth less than what you paid for it, so your composite rate will never drop below 0%.

The Treasury adjusts I Bond rates every six months, on the first business day of each May and November. What are current rates for I Bonds purchased from May–October 2022? The fixed rate is an annualized 0% for the life of the bond. The inflation rate is an annualized 9.62% for at least the first six months. After that, your bond’s inflation rate may rise or fall over time, based on the Treasury’s semi-annual November/May rate changes.

In other words, if you purchase an I Bond today, you are essentially guaranteed to earn a 9.62% annualized interest rate for the next six months. If inflation remains high after that, so too will your I Bond’s interest payments.

No wonder I Bonds are receiving increased attention—and investor dollars—even though they’ve been around since 1998. Where else can you earn nearly 10% annually, essentially risk-free, on relatively accessible cash? If you’re aware of similar opportunities, please let us know!

The Rules of I Bond Engagement

So far, so good. But before you prepare to pile your life’s savings into I Bonds, let’s review their “operating instructions.”

Maximum Investments: You can only purchase up to $10,000 in I Bonds per person, per year, although you also can direct up to $5,000 of a tax refund into paper I Bonds on top of that. (Paper bonds can be converted to electronic ones with extra effort. You also can gift I Bonds to others, and invest in them through a business entity. We won’t cover the details here, but we’d be happy to discuss them with you in person if they’re of interest.)

Liquidity: The money you tie up in an I Bond is relatively, but not entirely accessible to you for cashing out as needed. Once you purchase an I Bond, you must hold it for at least a year (with a few hardship exceptions). You may hold it for up to 30 years before it comes due. If you cash out after 1 year but before 5 years, you are penalized three months of interest. This represents more of a speed bump than a road block if you want or need your money back during that period.

Tax Ramifications: At the Federal level, I Bond interest is tax-deferred. As described in this TIPSwatch “I Bond Manifesto” article, “You can elect to report [I  Bond] interest annually if you prefer, but most investors choose the default tax deferral option and thus only pay tax on the accumulated interest when they eventually redeem the I Bonds.” (Hint: This also offers you the opportunity to deliberately redeem the bonds in tax-favorable years.)

I Bonds are exempt from state and local income taxes, offering extra incentives if you live in a high-tax region. There’s also a Federal tax exclusion if your income level qualifies you, and you spend the proceeds on qualified educational expenses. To be eligible in 2021, your Modified Adjusted Gross Income (MAGI) had to be under $98,200 for single, or $154,800 for married filing jointly filers.

Logistics: I Bonds are only sold directly to you, the public, through an account you establish at This means we, as your advisor, cannot open or manage your I Bond account for you. We can coach you as you access the TreasuryDirect system, and advise you on the financial, investment, and tax-planning logistics. But unfortunately, you must hold your I Bonds outside of your primary portfolio. On the plus side, because this is a direct deal between you and the Federal government, there are no ($0) investment fees. If you purchase a $1,000 I Bond and hold it for at least 5 years, you will receive $1,000 back, plus all interest earned.

Timing: Here’s another tip from the I Bond Manifesto: “Interest is earned on the last day of each month and is posted to your account on the first day of the following month. So, if you own your I Bonds on the last day of any month, you’ll earn that full month’s interest.” In other words, if you buy an I Bond toward the end of the month, you can keep that money working elsewhere until then, and still receive the full month’s interest. Reverse that logic by selling I Bonds toward the beginning of the month, and still accruing that month’s interest in your TreasuryDirect account. Your one-year holding period also starts at the beginning, not the end of the month in which you purchase the bond.

Are I Bonds Right for You?

I Bonds are an attractive opportunity at this time. But are they the right opportunity for your greater financial needs? Before you buy, here are a few caveats to consider.

Complexities: Having a account filled with I Bonds purchased over the years represents one more set of financial details to track. The inconvenience multiplies if you also purchase any paper I Bonds, directly or through tax refunds. There are due dates to remember, rates to monitor, taxable interest to report, and account security to manage. Is the hassle factor worth it to you? Maybe yes; maybe no. Financial planner Allan Roth reminds us in his AARP article:

“Later on in life, we are all subject to cognitive decline, and decluttering the number of accounts helps protect our nest egg. … [The Treasury does] not send out statements or 1099-Int forms, so make sure your spouse and heirs are aware you have this account. Many executors discover accounts of the deceased by reviewing statements and tax returns, and these I Bonds won’t show up for them.”

Best, Highest Use: It’s always satisfying to score strong returns on any given holding. But if you do decide to purchase I Bonds, where will the money come from, and how else could you have used it? If you’re thinking about tapping your greater portfolio to buy I Bonds, let’s incorporate the action into your structured investment plan. If you plan to use cash reserves already allocated for upcoming expenses or emergency reserves, let’s make sure the one-year holding requirement won’t become a cash-flow problem if unexpected expenses arise.

In short, even if we’re unable to directly manage your I Bond accounts for you, we can still walk along side you as you make use of this enticing, inflation-busting opportunity. How much money can you comfortably allocate to I Bonds? How can we make best use of their tax-planning possibilities? What other questions can we answer for you? Before you buy, let’s talk.

PLC Wealth Management, LLC (“PLCW”) is a state registered investment adviser located in Raleigh, NC. PLCW is registered in the state of North Carolina and in compliance with the current registration requirements of the states in which PLCW maintains clients. PLCW may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.