Good news! For those who have purchased Series I Savings Bonds (iBonds), the interest rate for the next 6 months will adjust shortly to 9.6%! The official rate will be announced in May, but I am highly confident in this estimate based on the observed inflation rate over the past 6 months.
If you haven’t yet maxed out your iBond purchases for this year ($10K per person / $20K per couple), consider doing so ASAP. If you are not sure what iBonds are, read my earlier blog post that goes through the basics.
For those who have maxed out their limits for 2022, I have even better news. There is a way to increase your purchases beyond the limit. It takes a bit of work, but the payoff could be $5,000 in two years. If you are interested, read on. If this seems like too much hassle, it is okay to pass as well.
Important: Any iBonds you buy BEFORE the end of April will lock in a rate of 7.12% for the first six months and 9.6% for the second six months (for a one-year risk-free return of about 8.4%). If you wait till May, you will only lock in 9.6% for six months. Should inflation remain high, you benefit in subsequent periods either way. The main benefit of buying before the end of April is you get an extra six months of 7% return.
Advanced iBonds Gift Box Strategy
In a nutshell, the gift box strategy allows you to pull forward iBond purchases from future years. It doesn’t increase your limit for 2022, but it allows you to “borrow” from your 2023 / 2024 limits and use them now.
This strategy takes advantage of the unique gifting attributes of iBonds and does require another person that you trust for it to work. For most people, this person will be a spouse or a significant other.
The strategy works as follows:
- You log into your Treasury Direct account and buy $10,000 worth of iBonds as a gift for your spouse. (You have to enter the name and social of the recipient at time of purchase). You can do this even if your spouse has already used up his or her limit for 2022.
- The iBonds you buy as a gift go into a special “Gift Box” section of your Treasury Direct account and begin earning interest immediately. If you do this by the end of April, the bonds will earn 7.12% interest for the first 6 months and 9.6% for the second 6 months (~8.4% over the first year).
- The iBonds remain in your “Gift Box” inside your account indefinitely until you choose to “deliver” them to your spouse. The only requirement is that your spouse has unused limit in the current year to deliver them. Assuming your spouse already maxed out for 2022, you will need to wait till 2023 to deliver the bonds.
- In 2023, you deliver the bonds as a gift from your account to your spouse’s Treasury Direct account. Instead of purchasing new bonds in 2023, he/she will use his/her 2023 iBond limit to receive your $10K gift delivery.
- You spouse does exactly the same for you, repeating steps 1-4 above with a $10,000 gift purchase in his/her Treasury Direct account, but with the bonds in your name.
The effect of the above is that you are able as a household to borrow from your 2023 purchase limits and spend $20K now to buy iBonds while the interest rate is high. This strategy works because iBonds earn interest even while “undelivered” in your gift box and there is no requirement to deliver the bonds within a set time period.
How Far to Take This Strategy
There is no limit on how many iBonds you can buy as a gift even for the same person. However, if you buy too much, you won’t be able to deliver them for many years as you can only deliver $10K per year (the annual limit). Let’s look at different purchase amounts.
The first $10K per person / $20K per couple:
- The bonds would be delivered in 2023.
- This is a no brainer and a risk-free 8.4% return for a year
- If inflation drops in 2023 and the rate resets much lower next year, you can simply deliver the bonds in 2023 and redeem them shortly after. It is a bit like buying a 1 year CD for 8.4%.
- The 1 year required holding period for iBonds starts from the date of purchase, not date of delivery.
The second $10K per person / $20K per couple (this would be $40K cumulative per couple)
- You can only buy iBonds up to $10K per bond, but you can buy multiple gifts of $10K for same recipient.
- However, since the first $10K will be delivered in 2023, the next $10K would need to wait till 2024.
- Thus, the second $10K would be locked up for 2 years.
- We know the return in the first year is 8.4%, but we don’t know the return in the second year (which will be based on inflation over the next 12 months).
- Let’s say inflation moderates to 4% over the next 12 months. You would earn an average return of 6.2% over 2 years: (8.4% + 4%) /2. Not bad.
- If inflation miraculously drops to Fed’s 2% target, you would still earn 5.2% over 2 years: (8.4% + 2%) / 2. This is still decent, especially for a risk free return.
The third $10K and beyond
- The third $10K would be locked up for three years as it would not be delivered until 2025.
- We can only be certain of a 8.4% return in the first year, with year 2 and 3 to be determined by inflation.
- In an extreme scenario where inflation is only 1% for years 2 and 3, your average return over 3 years would be just 3.4% = (8.2% + 1% + 1%)/3.
What I Plan to Do
You’ll have to decide what you are comfortable with. Here is what I plan to do for my household. I will buy two bonds of $10,000 each for my wife and my wife will do the same for me. In total, we will spend $40,000 to purchase the bonds before the end of April. Half will be delivered in 2023 and the other half in 2024.
The expected payoff in two years will be about $5,000 in profit.
- Here is how I get to the estimate. 8.4% return in the first year on $40,000 in bonds is worth $3,360.
- Lets say inflation is 1/2 that rate in year two. Interest in year two will be worth $1,680.
- Add year 1 and 2 two together and you get to just about $5,000.
- If inflation remains high, the expected payoff would be even greater.
How to actually do this
It only takes 10-15 minutes to actually do this once you know what to do.
Treasury Direct actually has a quick 2-minute video that explains how to purchase iBonds as a gift. There is also a brochure that walks you through step by step.
https://www.treasurydirect.gov/indiv/planning/plan_gifts.htm
Watch the video first and here’s a few tips to follow:
- You’ll need to “Add New Registration” to create a profile for your spouse in your Treasury Direct account
- You’ll want to choose the “Beneficiary” option and put your spouse’s info in the “First-Named Registrant” and your info in the “Second-Named Registrant / Beneficiary” space.
- Be sure to mark the “This is a gift” checkbox.
- When you buy the bonds, be sure to choose the correct profile in the dropdown box with your spouse’s name POD your name (POD stands for payable on death).
Rarely do you get the chance to earn 8.4% risk free. This is worth $5,000 if you can invest $40,000. Even if it takes you two hours to figure this out (it won’t), how often do you get the chance to earn $2,500 per hour?
Disclosure:
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.
The information in the article is provided for informational purposes only. It should not be construed as investment advice or advice on buying, selling, or other types of transactions relating to an investment in products or services, much less an invitation, an offer or a solicitation to invest.
The information in the article is provided solely by virtue of the fact that everyone will independently make their own investment decisions: the report does not take into account investment objectives, nor specific needs or financial situation. In addition, nothing in the article represents or is intended to express financial, legal, accounting or tax advice. You should consult your own investment or financial advisor before taking any actions.
