9.62% interest that is tax deferred! Not to good to be true...

Through October 2022, you can buy Series I bonds that pay 9.62 percent interest.

And you receive that rate for six months from the time of purchase.

What happens after that? On November 1, 2022, the U.S. Treasury Department sets a new six-month rate equal to the fixed rate (currently zero) plus the Consumer Price Index inflation rate.

The interest you earn for the first six months gets added to the principal, and you earn interest on that interest during the next six months (think compound interest).

Sounds too good to be true. There’s a trick, right? Not really, but the government keeps your money, both your principal and your interest, for at least one year.

How Does This Work?

It works like this: You are buying a 30-year bond. The interest rate changes every six months. You can cash out anytime after one year, but if you cash out before five years, you have to forfeit three months of interest (no big deal).

You don’t pay taxes on the interest until you cash out. You get the compounding effect tax-free. It’s like a Roth IRA without age limits and penalties.

Key point. You can’t lose the money you invest or the interest you earn, other than the three months’ worth if you cash in before five years.

When you do cash in, you pay federal income taxes on the interest, but you don’t pay state, county, or city income taxes.

It is possible (albeit unlikely for many of you) to avoid taxes on the interest altogether if you use the monies for qualified higher education expenses.

Okay, So What’s the Downside?

You can’t buy more than $10,000 per year, although if you buy from TreasuryDirect and also utilize your tax refund, you can acquire $15,000 of bonds per year. The I bond purchase limit on a tax return is $5,000—regardless of joint or single filing.

If you’re married, your spouse can buy $10,000, so now you’re up to $25,000 per year.

Now, let’s add in your corporation or corporations. Such entities can purchase up to $10,000 of such bonds per calendar year.

Example. Sam, his spouse, and his two corporations are hot for the 9.62 percent of tax-deferred interest. He has not yet filed his 2022 tax return, which shows a tax refund. With Sam, his spouse, and his two corporations, Sam can buy $45,000 of I bonds in calendar year 2022.

He can do the same during calendar year 2023.

The major downside to the bonds is that you cannot buy more than the annual limits above. There’s no overall limit, just the annual limits.

Inflation and Deflation

The Series I bond is based on inflation. So if inflation drops to zero, cash out that bond. Meanwhile, ride this inflation wave. And remember, your Series I bond cannot go down in value. If your $10,000 I bond earned $985 in interest, the new principal balance is $10,985 and that principal balance never goes down. Deflation can’t hurt it.

This information came to me courtesy of the Bradford Tax Institute and their newsletter that I subscribe to.

This article is NOT financial advice but is educational and general in nature. Consumption of this this article does not establish a client relationship and it is advisable to consult a qualified financial advisor for advice in relation found in this article.