Series I Savings Bonds an Essential Investment

Series I Savings Bonds should be included in every investor’s portfolio.  This asset purchased directly from the U.S. Treasury without fees is an effective hedge against inflation and higher interest rates.

Series I Savings Bonds can only be purchased through the U.S. Treasury and are not for sale at brokerage firms.  Private firms do not receive commission or fee income from their purchases.  Not surprisingly, most financial advisors do not aggressively tout the advantages of these assets.

 The Series I bond, an accrual bond issued by the U.S. Treasury tied to inflation.   This post looks at:

·       Key features of Series I Savings Bonds,

·       Reasons for purchasing Series I Savings Bonds

·       Differences between Series I Savings Bonds and Treasury Inflation Protected Securities (TIPS)

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Key Features of Series I Bonds:

• Backed by the full faith of the U.S. Treasury

• Cannot be redeemed until one year after issue.

• Redemptions prior to five years from issue date forfeiture of one quarter of interest.

• The composite interest rate changes every six months,

• The interest rate is based on two components – a fixed rate and the inflation rate.   

• The composite rate is guaranteed to not fall below zero.

• The interest is taxed when the bond is redeemed.

• Bond matures and stops paying interest after 30 years.

• The Treasury limits annual purchases of the bonds to $15,000 per person with a limit of $10,000 on electronic purchases and $5,000 on paper purchases.  The paper Series I bonds can only be purchased through refunds from the IRS.  Additional Series I bonds can also be purchases through a Trust or business after setting up an entity account.

Reasons for Purchasing Series I Bonds:

• Series I Bonds, unlike traditional bonds and bond ETFs, do not fall in value.

• In the current low-interest rate high valuation environment, traditional bonds and stock prices are almost certain to decline in value.  

• A retired person with I-Bonds outside of a 401(k) plan can respond to a market downturn by using proceeds from the redemption of I-bonds to fund current consumption rather than disburse funds from a 401(k) plan, which could be temporarily down in value.

• The Series I Bond is a riskless asset.  Investors with this asset can reduce holdings of traditional bonds and cash and increase investments in equities.

Difference Between Series I Bonds and TIPS:

Treasury Inflation Protection Securities (TIPS also allow investors to protect returns when inflation and interest rates rise.

Key differences between TIPS and a Series I bond as explained here:

• The TIPS value can fall in an era of deflation.  The Series I bond never falls in value.

• The tax on interest from TIPS is paid annually and not deferred to redemption

• TIPS bonds can be sold without forfeiture of any interest at any time.  The redemption of a Series I bond is not allowed until after a year from the purchase date and sales prior to five years from the purchase date involve a forfeiture of a 3 months of interest.  

• All TIPS can be counted as a liquid asset.   Only Series I older than 5 years from issue should be considered liquid.

• Up to $5.0 million in TIPS can be purchased in a single auction.  The annual limit on the purchase of Series I Bonds is $15,000.

Additional information on Series I bonds can be found here.  

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