A popular U.S. government-backed investment has recently become even more attractive, especially for tax-savvy investors who are worried about inflation.
I wrote about the tax advantages and other aspects of Series I savings bonds in a column earlier this year. That column received numerous follow-up inquiries from Wall Street Journal readers. The popularity of these investments is likely to continue with the U.S. Treasury Department announcing a few weeks ago that the initial annual interest rate on new Series I savings bonds is on sale from May through May. 10 years this is 9.62%.
To be sure, no investment is perfect for everyone. Burton Malkiel, author of the investment classic “A Random Walk Down Wall Street,” says Series I bonds have so many compelling characteristics that they represent an “absolutely amazing” investment opportunity. “.
So, here are answers to some of our readers’ questions as well as other questions investors may have about bonds.
If I buy these Series I savings bonds, what is the minimum amount of time I have to hold them?
At least one year. If you can’t afford to lock up any money at least in the long run, these bonds aren’t for you. But if you can, keep in mind that they can continue to earn interest for 30 years or until you decide to transfer the money to them, whichever comes first. If you buy them back five years in advance, you will lose interest in the previous three months. “For example, if you pay Bond I after 18 months, you will receive interest for the first 15 months,” the Treasury website says.
If I buy now, am I guaranteed to receive that 9.62% interest for the time I hold the bond?
No. That 9.62% rate is just the initial annual rate of the new I bonds sold between May and October of this year. That rate “applys for 6 months after the purchase is made,” the Treasury website says. “For example, if you buy Bond I on July 1, 2022, the 9.62% rate will apply through January 1, 2023. Interest is compounded every two years.”
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The Treasury resets rates every six months based on a formula related to inflation. Since no one knows exactly what will happen on the inflation front, we don’t know today what the new initial rate will start in November.
“The rate update affects both new and previously issued bonds,” said a Treasury spokesperson. “The compound interest rate applicable to the Series I savings bonds is updated every six months from the time the bond is issued until the bond matures.” For more details on how bonds earn interest, see Treasury website.
Is there a limit to how many of these bonds I can buy each year?
It’s correct. The annual limit is $10,000 per person, according to the Treasury Department. You can buy bonds electronically from Treasurydirect.govand you can also buy up to $5,000 more a year of paper I bonds using federal income tax refund. Additionally, many investors buy Series I bonds not only for themselves, but also as gifts for relatives, friends, and others.
If you buy them as a gift, the purchase amount “counts toward the recipient’s annual limit, not the giver’s,” the Treasury said. Asked if the limits could be raised, a Treasury spokesperson replied: “There is not a single proposal under consideration that would raise the ceiling.”
I bought $10,000 of Series I bonds late last year. Do I have to wait up to 12 months from the date I bought them to buy more? Or can I buy more anytime this year?
You don’t have to wait 12 months. You can purchase more anytime during 2022. “Annual purchase limits apply to the calendar year and reset on January 1,” according to a Treasury spokesperson.
Interest rates in general have increased significantly. Can the value of these bonds fall below my purchase price?
No. Treasury says the value of your I bonds can never be less than what you paid for them: “The interest rate cannot go below zero, and the call value of your I bonds cannot decrease.”
What are the most important tax advantages with savings bonds?
Interest income from savings bonds is exempt from all state and local income taxes. That can be an important attraction for many high-income investors in high-tax areas, such as California and New York City. (But some states, including Florida, Texas, Washington, and Nevada, do not have a state income tax.) The Tax Foundation does. state tax details.
Part or all of interest may also be excluded from federal income taxes, but only in certain circumstances. “Using money for higher education may keep you from paying federal income tax on your profits,” according to the Treasury Department. But there are important limits, such as the size of your earnings and other fine print. Income thresholds often change each year. For details, see IRS Form 8815.
Another intriguing feature that may surprise some taxpayers: Bondholders have flexibility in deciding when to report interest income. Most taxpayers choose to defer reporting interest until they file a federal income tax return for the year in which they received “the value of the bond, including interest,” the Treasury Department said. But there’s another option: Report interest every year, which can be a smart move for someone with little or no taxable income.
For more information, see TreasuryDirect’s answer to Frequently asked questions.
Separately, one reader questioned qualified charitable distributions, or QCDs, a tax-smart technique used by many older investors to make charitable donations from individual retirement accounts. traditional. In particular, readers want to know if taxpayers making charitable distributions qualify and qualify to exclude the entire amount from such transferable income on their federal income tax return. their state as a charitable donation or not.
Answer: No. “You cannot claim a charitable contribution deduction for any QCD that is not included in your income,” the IRS says in Publication 590-B.
Even so, the technique may still be valuable to many older taxpayers for a number of reasons. QCDs typically allow investors 70 or more to transfer $100,000 per year directly from an IRA to a qualifying charity without incurring taxes. If done properly and you’re 72 years old or older, this transfer counts toward any of your required minimum distributions for that year. Plus, it doesn’t even count toward your adjusted gross income, which is an important number that can affect many other items on your tax return.
Warning: Donor-advised funds are not considered eligible charities for this purpose.
Mr. Herman is a writer in California. He was previously a columnist for the Wall Street Journal Tax Report. Send tax comments and questions to email@example.com.
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