Are Treasury I-Bonds a Good Investment? Downside Risks and Tax Considerations

So after seeing a lot of buzz around the amazing yields being paid on Treasury Series I Savings Bonds (I-Bonds), I decided to take the plunge and buy some for my wife and I as a place to park some cash while the stock market gyrates and inflation remains stubbornly high.

The buying experience was a little bumpy Treasury direct’s antiquated website (which did recently get a minor landing page facelift) can take some time to navigate, but given the negative medium-term economic outlook and the nearly 7 percent yield on offer with I-Bonds, it was a hard investment to pass up.

But here are some of the items to keep in mind if you chose to buy these I-Bonds.

Remind me again, what are I-Bonds?

I savings bonds are issued by the US treasury and like regular bonds provide interest payments on your initial investment (secured principal amount) over the term of your holding. The interest payments on I-bonds are based on two components, a fixed rate and a variable rate, which changes every six months.

The fixed rate has been at 0% for many years, but the variable rate, which adjusts every six months based on inflation is now nearly 7%. This is down from 9.62% in the last coverage period and a reflection of the fact that interest rates are falling. But the interest rate on I-Bonds are still more than two to three times the average savings account yield.

Coverage PeriodInterest Rate
 November 2022 through April 2023 6.89%
May 2022 through October 20229.62%
Recent I-Bond Interest rates (see full table)

You can buy and learn more about Series I Savings Bonds via the TreasuryDirect site. You should give yourself a couple of hours to research and setup an account to buy the bonds.

I also highly recommend doing this via your desktop PC or laptop, and not on your mobile phone. You’ll see why in the section below.

Once you buy the bonds, it takes 2 to 3 of days for the transaction to complete and for the funds to withdrawn from your bank account.

Note that due to the surge in demand for I-Bonds, the Treasury Direct site is crashing quite often. So give your self time and have a lot of patience when opening up a new account.

When setting up an online account, pick a simple password

The Treasury Direct site webpage looks like it is from the early 2000’s in terms of technology and functionality. Hopefully their IT department is working on an upgrade!

Though the overall site security is very solid with Multi-factor authentication in place. Which means every time you log in, you will need to enter your password via their virtual keyboard. You will then be emailed a One Time Password (OTP) per the email below.

Because their virtual keyboard is a pain to use, pick a relatively short (but secure) password. This will save you time and frustration if logging in from your mobile phone!

Treasury Direct One Time Password (OTP)

2022 to 2023 I Savings Bond Purchase Limits

The maximum amount of Treasury I-bonds an entity, individual or business, can buy in a single calendar year is currently $10,000.

So a single person (adult or child) can buy $10,000. Meaning a family of 4 could technically buy up to $40,000 in one year. Similarity if you have a S-Corp or LLC, you can buy $10,000 under that entity. Same goes for trusts.

If you want to get really fancy, you could open several trusts or corporations and buy I Bonds. But that is a whole separate matter and well beyond the scope of this article.

I Savings Bond Purchase Limits
I-Bond Purchase Limits

Tax Refund Boost to I-Bond Annual Limit

While an individual can only directly buy up to $10,000 in I bonds each calendar year, you can go beyond that limit by using your IRS tax refund to buy an additional $5,000.

You need a separate account for your spouse!

I made the mistake of opening my online account and trying to buy I Bonds for my wife as a secondary beneficiary via my online TreasuryDirect (TD) account.

The treasury direct site is very unclear about the need to have separate online accounts, so I thought for admin sake it would just easier to have one account and manage all the holdings there. Big mistake.

So when I deposited $10,000 for myself, I decided to deposit $2,000 for wife in another account, with the plan to add $2,000 every month until she hit the $10,000 limit.

This did not quite work out as I got a notification from TD that I had exceeded the annual contribution limit and my deposit would be refunded. It took nearly three months to get the money back in my bank account.

Lesson Learned: You need an separate online account for each person/entity purchasing I-Bonds. I.e. a married couple must open two separate Treasury Direct (TD) online accounts if both spouses wish to purchase I Bonds up to the maximum $10,000 limit. So get ready to repeat the online registration process multiple times!

You can however add each spouse as a secondary beneficiary or gift recipient, but you will need to have separate individual accounts for purchasing up to the maximum limit and for future redemptions.

Should I use the I Savings Bonds as my Emergency Fund?

Not really. First, the $10,000 annual limit is probably too small for a true emergency fund. But the biggest issue is that once you open and fund an account you can’t withdraw the money for at least one year. So not very liquid. There’s also a three month interest penalty for selling within five years.

Given all these factors, I would not recommend these as a short term emergency fund. It’s really more of a diversification play to hedge against inflation and get a better than average return on some of your medium term cash holdings.

Refunds from Treasury Direct for I-Bonds

Be prepared to wait a long time if you expect a refund of an over contribution from Treasury Direct. It took me nearly 3 months to get my $2,000 back – despite several emails with their customer service saying would be done in a few business days.

So make sure you get your annual/calendar limit contribution right, or be prepared to wait several weeks or months for excess contribution refunds.

I have read redemptions are more orderly, but be prepared to wait as the return of funds is not immediate.

Talking to a Live Representative or Agent

Trying to talk to a live person at the Treasury department for questions with an I-Bond is like trying to get through to a live IRS agent (also a treasury department). Hard to do and expect a long wait.

The best option is to use their email option and wait for a response that could take several business days. But it does work from experience and you will eventually get a response.

Also their FAQs on the website are pretty extensive, but sometimes hard to navigate and find the question you are trying to find an answer for.

Given their popularity, you can now google most questions you have; just make sure you corroborate answers across a few sites.

Tax Considerations and Penalties

In addition to the appealing interest rates, a big benefit of I-Bonds are that they are exempt from state and local taxes.

They could also be exempt from federal taxes in certain situations as discussed in the next section.

Should I buy I-Bonds for my kids to get the education federal tax exemption?

I grappled with this question for a while and the short answer is generally No. Instead max out for your wife and you, but use 529 accounts for your kids college funds.

Ironically however the best option for redeeming your I-Bonds is to pay for your kids education in the same year you redeem them.

I know that sounds strange, but the way the tax laws are written means that if you use I bond proceeds to pay for higher education expenses you may not have to pay federal tax on the interest.

This only applies if you are the owner of the bond. If you want to use the bond for your child’s education, then you or your spouse, or both, must own the bond.

Your child under the age for 24 may be a beneficiary of your bond but cannot be a owner or co-owner in order to qualify for the [federal tax] exclusion.

There are also income limits to being able to take the federal tax exclusion. Your MAGI (modified adjusted gross income) has to be less than $98,200 for single taxpayers and $154,800 for married filing jointly, but a gradual phaseout of the benefit begins at lower income levels.

This is the cut-off amount set by the IRS (per Form 8815) and adjusts every year. I will post updates to this article as the income and contribution limits adjust.

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What if the US Government defaults and/or cannot make payments? Downside Risks

All treasury products are guaranteed by the US government. This is what makes them so safe and in normal times, so much lower yielding than commercial bonds.

TD I-Bonds are probably one of the safest investments out there and a very low chance of default. At worst case the government will just print more money to make bond interest payments.

If the US Government does default for some unknown reason, you will likely have bigger issues with your other investments!

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