Recently, a well-known investment backed by the U.S. government has become even more attractive, especially for tax-smart investors who are concerned about inflation.
I wrote in a column earlier this year about the tax benefits and other aspects of Series I savings bonds. This column gathered a lot of follow-up questions from Wall Street Journal readers. The popularity of these investments is likely due to the fact that the US Treasury announced a few weeks ago that the initial annual rate of new Series I savings bonds for sale from May to October this year is 9.62%.
Sure, no investment is perfect for everyone. But Series I bonds have so many attractive features that Burton Malkiel, the author of the classic investment in “A Random Walk Down Wall Street,” says the investment opportunity is “absolutely great.”
So here are the answers to some of these questions from readers, as well as any questions investors may have about bonds.
If I buy these Series I savings bonds, what is the minimum time I need to have them?
At least a year. If you can’t block money for at least as long, these bonds are not for you. But if you can, keep in mind that they can continue to earn interest for 30 years, or until they decide to charge money, whichever comes first. If you repay before five years, you will lose interest for the previous three months. “For example, if you charge an I bond within 18 months, you will receive interest for the first 15 months,” the Treasury website says.
If I buy now, will I be able to get that 9.62% rate while I keep the bonds?
No. This rate of 9.62% is only the initial annual rate of new I bonds sold from May to October this year. This rate “applies within 6 months of purchase,” the Treasury said. “For example, if you buy an I bond on July 1, 2022, 9.62% would apply until January 1, 2023. Interest is compounded every six months.”
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The Treasury resets the rate every six months based on an inflation-linked formula. No one knows exactly what will happen in inflation, today we do not know what the new initial rate will be when it starts in November.
“The rate update affects both new and previously issued bonds,” says a Treasury spokesman. “The compound interest rate applied to a Series I savings bond 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 the Treasury website.
Are there any limits on these bonds that I am allowed to purchase each year?
Yes. The annual limit is $ 10,000 per person, according to the Treasury. You can purchase the bonds electronically at Treasurydirect.gov, and you can also purchase an additional $ 5,000 a year in paper I bonds using your federal income tax refund. In addition, many investors buy Series I bonds not only for themselves, but also as a gift for family, friends and others.
If you buy it as a gift, the number of purchases “counts toward the recipient’s annual limit, not the donor’s,” says the Treasury. Asked if the limits could be raised, a Treasury spokesman said: “There are no proposals to raise the limit.”
I bought a $ 10,000 Series I bond last year. Do I have to wait 12 months from the day I bought it to buy more? Or can I buy more this year?
You don’t have to wait 12 months. You can buy more at any time during 2022. “The annual purchase limit applies to the calendar year and is reset on January 1,” according to a Treasury spokesman.
Interest rates have generally risen sharply. Can the value of these bonds fall below my purchase price?
No. The Treasury says the value of your I bonds can never be lower than what you paid for them: “The interest rate cannot be lowered below zero and the amortization value of your I bonds cannot be lowered.”
What are the most important tax advantages of savings bonds?
Interest-bearing savings bonds are exempt from all state and local income taxes. This can be a major 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 state income taxes.) The Tax Foundation has details of state taxes.
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- If you have any questions about taxes
Part or all of the interest may also be excluded from the federal income tax return, but only in certain circumstances. “Using money for higher education will prevent you from paying federal income tax on your interest,” according to the Treasury. But there are important limitations, such as the size of your income and other small print. Income thresholds usually change from year to year. See IRS Form 8815 for details.
Another appealing feature that may surprise some taxpayers is that debtors have the flexibility to decide when to report interest income. Most taxpayers decide to defer notification of interest until the Treasury says it has filed a federal income tax return that includes “the value of the bond, including interest.” But there is another option: to report interest every year, which can be a smart move for those with little or no income.
For more information, see TreasuryDirect Answers to Frequently Asked Questions.
Separately, one reader asked a question about qualified charitable distributions, or QCDs, a highly intelligent tax intelligence technique used by many older investors to make a charitable donation from a traditional retirement account. Specifically, the reader wanted to know if taxpayers who make a qualified charitable distribution and are eligible to exclude the full amount of income can deduct this transfer from the federal income tax return as a charitable donation.
Answer: No. “You cannot claim a deduction for charitable contributions for QCDs that are not included in your income,” the IRS says in publication 590-B.
However, this technique can still be valuable to many old taxpayers for a number of reasons. A QCD typically allows investors with $ 70 or more to transfer $ 100,000 per year directly from the IRA to a qualified charity without that transfer being taxable. If done correctly and you are 72 years of age or older, this transfer is valid for the minimum distribution required for that year. It also does not include your gross income, which is a significant amount that can affect many other items in your income.
Warning: Funds recommended by donors are not considered qualified charities.
Mr. Herman is a writer in California. He was first a columnist for The Wall Street Journal’s Tax Report. Send comments and tax questions to email@example.com.
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Series I Savings Bonds: What Readers Want to Know
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