The Treasury has announced a significant increase in the interest rate on Series I savings bonds, which will take effect from Wednesday. Previously set at 4.3% for the six months leading up to Tuesday, the new rate has now been raised to 5.27%.
According to the information posted on the Treasury Direct website on Tuesday morning, this increase is a result of a 3.97% inflation component and a fixed, or real, rate of 1.3%. The 5.27% interest rate will be applicable to bonds purchased within the next six months.
The rise in interest rate is attributed to both an increased fixed rate and higher inflation, as determined by the consumer price index for the six-month period ending in September compared to the previous six-month period. The fixed rate for bonds purchased before Tuesday was 0.9%.
The upward adjustment in the fixed rate aligns with the growing market interest rates, particularly with Treasury Inflation Protected Securities (TIPS), which currently offer a real rate of approximately 2.5%.
It was previously projected, following the release of the September CPI report in early October, that the new interest rate for I bonds would surpass 5%.
Investors should note that the new rate will apply for the first six months of holding the bonds and will then be reset every six months based on the CPI. While I bonds mature in 30 years, they can be redeemed after just 12 months. However, if cashed in before five years, investors will forfeit a quarter's interest.
In 2022, I Bonds gained substantial popularity due to high inflation rates, offering a remarkable 9.6% rate from May to October that year. However, as inflation has decreased and short-term rates surged to 5%, the demand for I Bonds has waned. This rise in short-term rates has also led to the increased popularity of money-market funds and Treasury bills.
It's important to note that I Bonds can only be obtained through the TreasuryDirect website. While individuals are currently limited to $10,000 in annual purchases, there are ways to surpass this cap for certain partnership-based business structures.
Unique Interest and Taxation Benefits
Unlike Treasury notes and bonds, I Bonds compound semiannual interest, adding it to the principal value throughout the bond's lifespan. This advantageous feature eliminates any risk associated with reinvesting interest earnings.
In addition, one key appeal of I Bonds is their tax deferral on interest income until redemption. This appealing aspect gives I Bonds a similar tax advantage as an Individual Retirement Account (IRA).
I Bond holders can enjoy exemptions from state and local income taxes and are only subject to federal income tax, which aligns with the tax treatment of Treasury notes and bonds. Compared to bank deposits, where interest income is subject to federal, state, and local income taxes, the tax benefits of I Bonds make them a more favorable option.
In conclusion, I Bonds offer a distinctive investment opportunity with their unique interest compounding, tax advantages, and availability through the TreasuryDirect website. Despite a decrease in popularity in recent times, these bonds still provide valuable benefits that differentiate them from other investment options.