U.S. Treasury I Bonds FAQ (When To Buy $10,000 I Bonds? 9.62%? And More…)

(10/25/22: See updated version of this post for November 2022 6.48% rate in this post.)

We wrote about the upcoming increase in I Bonds rate for May – October to earn 9.62%. The reason is that U.S. Treasury I Bonds interest rate is tied to inflation which shot up lately. It’s not fun that to pay more for goods and services, but we might as well take advantage where we can and lock in $10,000 at the upcoming 9.62% interest rate.

We included much of the basics in our previous post, but I thought to use a different format and address some issues in question/answer format with those details and some additional tidbits that I’ve learned along the way.

• You say the rate is increasing in May. Why the hurry to buy now in April?

The rate for November 2021 – April 30 2022 is also historically high at 7.12%. You’ll want to buy up I Bonds before the end of April (give yourself a few days leeway) and lock in both the 7.12% rate and the subsequent 9.62% rate. You’ll get 7.12% for April, May, June, July, August, September. Then you’ll get the 9.62% rate for your October renewal which will be valid for October, November, December, January, February, March.

(Parenthetically, when you buy I Bonds in mid-month you get interest as if you bought at the beginning of the month. Whether you buy the 1st or the 29th or anywhere in between, you’ll get a full month of interest for that month.)

• Maybe inflation will continue and the rate will go up more at the next renewal?

It is possible, though I certainly hope not! In any case, you aren’t losing anything by locking up this high 7.12% rate now since you can always leave the money in the bond for longer and get that future potentially-higher rate. (Unless we see record inflation forever…let’s hope not.)

• How do you know the rate will be 9.62%? I only see the 7.12% on the Treasury site?

The rate won’t come out officially from the feds until May 1st. I haven’t worked out the inflation numbers myself, but the smart people figured out that the new May rate will be 9.62%.

• 9.62%…Does that mean if I buy $10,000 I’ll be able to cash out $962 in profit one year from now?

No, the 9.62% rate is only valid for six months. If you buy the I Bonds now in April, you’ll get 7.12% for 6 months and then 9.62% for 6 months = a blended rate of around 8.37% for 12 months.

However, it’s not so simple since you lose 3 months of interest if you break the bond in less than 5 years. And so, if you’re thinking short term, the plan here would be to deposit $10,000 now in April and keep it there for 15 months, until July 1, 2023. You’ll get 6 months of 7.12%, 6 months of 9.62%, and 0% for April, May, and June of 2023. I believe that comes out to around 6.70% APR/APY  for the entire 15 month time-period. Pretty good for a guaranteed investment!

In the end, you should land up with around $837 net gain after 15 months from the $10,000 bond purchase. It’ll actually be around $853 due to compounding.

• Is my money locked up or can I withdraw at any time?

It’s important to remember these funds are absolutely locked up for 12 months. After that you can withdraw with a 3 month penalty. After 5 years there is no longer any penalty. It fully matures after 30 years.

• Is it worth the hassle for $853?

At lower rates I wouldn’t bother, but at these increased rates I personally find it worth the trouble.

• I’m confused about the 6 month renewal period.

The rate gets renewed every six months on May 1st and November 1st. But you get the new rate on your own bonds beginning whenever your own six month time period renews. You get the rate for the following six months.

As an example, if you buy any time during the month of January, you’ll get the November-April rate for January, February, March, April, May, and June. Then you’ll get the May-October rate for July, August, September, October, November, December. Then you’ll get the November-April rate for January, February, etc, and so on.

Another example: if you buy during the month of April, you’ll get the November-April rate for April, May, June, July, August, September. Then you’ll get the May-October rate for October, November, December, January, February, March. Then you’ll get the November-April rate for April, May, etc, and so on.

• I’m confused about how to actually go about buying I Bonds?

Open an account with Treasury Direct at this link. (You can also go to the TreasuryDirect.gov home page and click Open Account on the right-hand side.) Go through the signup process. Once in your Treasury Direct account, go to the Buy Direct tab at the top of the page, then choose the Bonds ‘Series I’ option.

People complain a lot about how difficult the signup and login process is with the site, and the Treasury has promised an update. To be honest it’s not really that bad, just a little different than we’re used to. Mentally slot out a few minutes and you’ll be fine.

There are also sporadic complaints of needing special manual verification. Most people are verified in the automated process, and they’ve recently made the verification process easier. Give yourself some extra time just in case.

• Okay, I’m in! Is there any way I can purchase more than $10,000?

Yes, we wrote about many ways to lock in the rate on more than $10,000:

• Each spouse can buy $10,000, even if you file taxes jointly.
• You can buy $10,000 for a child. More details here.
• You can buy a separate $10,000 for your business EIN. If you have more than one business, you can get $10,000 for each.
• You can get an additional $5,000 as your tax overpayment refund if you have one (use form 8888 when filing). This one is a bit of a pain since it comes as paper bonds which can then be combined with your electronic I Bonds account.
• You can buy a separate $10,000 for a trust. I don’t know how difficult it is to open a trust, but it’s certainly a useful option for someone who already has one.
• You can gift I Bonds to someone which they can receive a different year and lock in the current rate. For example, you and your spouse can each buy each other $10,000 or $20,000 and lock in the current rate for 2023 and 2024. Please read the following post to learn more: Gifting US Treasury Bonds To Lock In Current Rates Beyond $10,000 Limit (I Bonds) and see the IRS video tutorial on this here.

Altogether you can accumulate a bundle.

• I bought $10,000 back in October 2021 at the 3.54% rate, which seemed high at the time. Will I still get the 9.62% rate at renewal?

Sure, just leave the funds in for an extra 6 months and you’ll get the 9.62% rate. You’ll get 3.54% for October 2021 through March 2022, then 7.12% for April 2022 through September 2022, then 9.62% for October 2022 through March 2023. (Don’t break the bond until at least July 1, 2023 to avoid penalty on the high 9.62% rate.) You didn’t lose anything by buying at the earlier rate.

If you haven’t done so yet, you can also buy another $10,000 now in 2022. As noted above, you should buy now in April and lock in 6 months of 7.12% and then 6 months of 9.62%.

Bonus FAQ’s

• Does the name on the funding bank account have to match the name on the Treasury account? Can we have two Treasury accounts linked to the same joint bank account?

I don’t know if there is any official word on this from the Treasury. Anecdotally, we’ve heard many many reports of two spouses who have separate Treasury accounts and link it to the same joint bank account.

I’ve also seen reports of linking an account in a different name or linking a business Treasury account to a personal bank.

Tangentially, be sure to link a bank account that you plan on having for the long term since it’s a pain to deal with switching.

• Can I open a Treasury account with a defunct EIN which isn’t in use?

I haven’t seen anything official from the Treasury, and my understanding is that it would be perfectly fine to do so.

Whenever you cash out the bond you’ll get a tax form 1099 to the business EIN. Assuming the business is a sole proprietorship, I believe the income just flows through to your personal return. I.e. you won’t have to pay for a separate business tax return to be done and it’ll be basically similar to having another form 1099 under your personal name. That’s what I think, but please consult a tax advisor on this first.

• Do I pay taxes on the interest earned from I Bonds?

Yes, you’ll get a tax form 1099-INT, typically when the bond gets cashed out; taxes can be deferred until the bond matures in 30 years. You can also elect to pay taxes each year, if you choose.

You only pay federal tax on the interest, not state or local taxes. There are ways of exempting yourself entirely from federal taxes if the funds are used for certain higher education expenses.

• Will my Treasury account show the balance increase each month?

The interest does show up monthly, but that starts only after the fourth month. This is because there is a 3-month penalty for withdrawals before 5 years. Note: While interest shows each month, it only compounds in 6-month increments.