The economy has caused some turmoil as of late. Markets haven’t been kind for the last couple weeks, and it is yet to be seen what impacts the student loan relief will have on the economy at large (if it, indeed, doesn’t get struck down by legal challenge). And speaking of, there may yet be some tax ramifications to that loan forgiveness… something my Louisville clients should touch base with me on.
The good news is that inflation has *technically* slowed… thanks to the much-needed relief brought by lower gas prices this past month. BUT… compared with where we were a year ago, this 9.1% means inflation still has a bit of a chokehold.
So, with that as the backdrop, I’d love to see my Louisville clients make wise decisions about savings and investment strategies. For some, it’s a simple admonition: start saving. (And yes, even when the shifting value of your dollar means that it doesn’t accumulate as fast as it should … it is nonetheless an important habit to automate into your life when possible.)
I’ve got a first step idea for you today, which I’ll get to in a moment.
If all of this feels chaotic … well, that’s why I’m here:
Now, perhaps it’s time that we take a look in the mirror — together — and make some changes that would help you better build for your financial future. Let’s start by looking at how purchasing savings bonds could add some cushion to your finances going forward…
TAC Taxes on How (and Why) to Invest in Savings Bonds
“If you’re saving, you’re succeeding.” – Steve Burkholder
You may have noticed that when people talk to you about personal finance, they mention many of the same savings tools, like 401(k)s or money market funds. Just as there are always new tools, of course, old ones for whatever reason fall out of favor. Sometimes they just get forgotten. (How many people do you know with a Keough retirement account?…)
One savings vehicle we used to hear a lot about and that fell out of favor for a while was the U.S. savings bond. “Worse than boring,” everybody always said, “they just don’t make you any money.”
Well, sooner or later everything old is new again. And right now it’s time to look again at the seriously hot Series I U.S. savings bond.
(I should hasten to add that none of this should be considered official investment advice. This is for informational purposes only and investment decisions should be made under consultation with YOUR particular financial advisor.)
Safe but effective
You heard us right. Series I U.S. savings bonds.
You buy these bonds right from the federal government, just as you would a certificate of deposit from a bank. As you can imagine, the risk is minimal because Uncle Sam stands behind them.
Usually, safe investments don’t return that much. But savings bonds are different when interest rates go up, which they’ve been doing lately as the Federal Reserve tries to check inflation.
The return varies with interest rates and inflation; in recent years these bonds have paid far less than they do now. But the initial interest rate on new Series I savings bonds right now is 9.62% – and you can lock that in through October.
The interest rate is a composite of a fixed rate of return and a variable semiannual inflation rate based on changes in the Consumer Price Index for all Urban Consumers. The rate is recalculated every six months but is guaranteed to at least match inflation.
Sounds like a deal.
The fine print
Nothing’s perfect in money, of course, and these bonds do come with a few conditions.
You have to hold them for at least a year. Cash-out whenever you want after that up to 30 years (even beyond, though with no more interest) but you will suffer a slight penalty – three months’ interest – if you cash out before five years. Experts say it’s still a lot less than the ding for cashing out early on a certificate of deposit.
Can’t buy them just anywhere. The only place to purchase electronic I-bonds is on the TreasuryDirect site.
Investments are limited. You can put only 10 grand per year max into Series I Bonds. The minimum purchase for an electronic bond is twenty-five bucks, fifty for paper bonds. (These bonds are mostly digital, but you can pick up another five grand max in paper bonds using your tax refund. We can help with the paperwork on this.)
Bonds you buy for yourself and bonds you receive as gifts or via transfers count toward the limit. Two exceptions: If a bond is transferred to you due to the death of the original owner, the amount doesn’t count toward your limit; or if you own a paper bond issued before 2008, you can convert it to an electronic bond in your account in TreasuryDirect regardless of the amount of the bond.
A (good) detail about giving bonds as gifts, which is how most people have thought about them over the years: The purchase amount of a gift bond counts toward the annual limit of the recipient, not you the giver. In a calendar year, you can buy up to a 15 grand total limit (10 grand in electric and 5 grand in paper) for each person you want to give a gift to.
These bonds are tax-deferred – never pay today what you can put off until tomorrow – and even in the world of tax-deferred they’re an especially good deal.
Interest on your bond incurs federal income tax and estate and excise taxes when you redeem the bond. You may also have to pay state tax on the interest for estates or inheritances – but no state income tax. (Interest from these bonds is also tax-free if you use it for qualified higher education expenses with a lot of conditions – check with us).
You receive a Form 1099 to report the interest; you can get an electronic version of the 1099 form on your TreasuryDirect account.
Is the time right?
It’s true that in most recent years the stock market beat the return of these bonds. It probably will again, too, particularly if inflation recedes and interest rates come back down. Plus, the investment limits and mandatory hold-time of savings bonds turn off a lot of people.
But right now, it’s a stable investment and a way to diversify your portfolio. Might be time to start bonding while the bonding’s good.
Whether or not you choose the savings bonds route, if you want some financial peace of mind through any difficult economic period, Louisville friends, you need to be thinking about how you can save and invest your money.
That’s something I’m more than happy to sit down with you and chat about. And while you’re at it, let’s talk about your tax situation:
On your team,