Treasury Direct Series I Bonds: Inflation Hedge

by Gloria Nichols

7.24.22

I’m sharing my 9 tips on inflation-indexed Treasury I bonds, because 80% of my friends didn’t know about them…

#1. The first 6-month interest rate is 9.62% annualized.

#2. The second 6-month interest rate will be set in November. Based on the 3% CPI-U increase in the 3 months since the current rate was set, IMO it’s reasonable to expect at least a 5% increase for the full 6 months, which would be 10% annualized.

#3. For those of you who might consider getting Treasury I Bonds but want to first know the full year interest rate, you can wait to buy until mid-October to decide whether to buy them.

By then we will know exactly what the new 6-month rate will be set at in November, as it’s based on CPI-U for March compared with the CPI-U for September of the same year. And you’d still get the 1st 6 months at 9.62% if you buy by the end of October.

#4. You can cash out your full principle any time after the first 12 months; however, if you cash out before 5 years, you forgo one quarter of interest, like many CDs. You don’t pay any tax on the interest until you cash them out.

#5. It only takes ~10 minutes to buy them online from Treasury Direct. YouTube has multiple tutorials.

#6. If your I Bond purchase goes through by end of July, you get paid interest for the full month of July.

#7. Maximum: You can double the $10K maximum annual investment per calendar year if you have a trust — and triple it if you have a business.  (all in separate Treasury Direct accounts)

If you overpay your federal taxes, you can apply up to $5K of your refund to I Bonds.  The minimum purchase is only $25, and you can buy a portion at a time.

#8. You and a partner/spouse/family member can each buy each other I Bonds as a gift. The I Bonds start earning interest immediately, then transfer them in a year where each of you are not buying I Bonds. The rules for this are more complex than I can cover here.

#9. Laddering I Bonds. I’ve started laddering I Bond purchases every year to serve as inflation-protected cash, until I hit my target.  I plan to keep the I Bonds until I either need the cash or the market shifts and/or savings accounts pay more than inflation.  The rates never go below zero, even during deflationary times.

More on Investing Beyond the $10,000 I Bond Standard Annual Maximum

Below is my understanding of how the US government allows you to buy more than the standard $10,000 maximum I bond annual purchase.

  • If you overpay your taxes during the year, you can apply up to $5,000 of your tax refund to an I bond. You just fill out the tax form 8888 with your 1040.
  • You can purchase a second $10,000 for your living trust.  These can be relatively inexpensive to set up and the money in them is completely accessible for a revocable living trust.
  • You can purchase a third $10,000 for your business.
  • If you have children under 18, you can buy each of them I bonds also.
  • You can gift them to others, to apply to a future year where they don’t buy them. This is complex and needs to be researched and executed properly

Something to consider. Good luck!

Disclaimer: Please do your research. I’m not a financial advisor.

Gloria Nichols

About the Author

Gloria Nichols has an MBA from Harvard Business School and a BS in Engineering from Stanford University. She does CMO and marketing consulting.