3 Ways To Grow Your Money Right Now, Part 1
In a time when inflation is eating away at your savings and the stock market has fallen even faster…
We, the Builders at Wealth Factory, want to bring you 3 ways to grow your money as safely as possible…
Or, as in this first case, earn a “nearly risk-free” 9.62% return.
But you have to hurry, because the U.S. Treasury says the last day to lock-in a 9.62% interest rate may be as soon as tomorrow, October 28th, 2022.
What’s Going On:
Series I-Bonds — usually referred to as just I-Bonds — have been called “nearly risk-free” by CNBC, MSN, Business Insider and other financial news outlets.
And for good reason. They are United States Treasury bonds that are 100% guaranteed by the Federal Government — and the U.S. has never defaulted on a bond.
So why is the U.S. government offering such a high return?
Simple. The “I” in I-Bond stands for “Inflation.”
And the interest rate that you earn goes up and down with the inflation rate.
Technically your return is made up of 2 rates: a fixed rate that never changes, and a variable rate that tracks the Consumer Price Index for Urban Consumers (CPI-U).
Currently the fixed rate is 0%, which is obviously not very appealing.
However with inflation soaring, I-Bonds have seen their returns soar, too, up to 9.62% recently.
But this is about to change. Every November and May, the variable rate updates to the new CPI-U inflation rate. And this November 1st, we expect that rate to drop.
That means you have until October 31st to get your I-Bonds that are basically guaranteed to return 9.62% interest for at least 6 months (until the variable rate resets again).
And the U.S. Treasury, who issues the bonds, recommends completing your purchase by October 28th to ensure your bond can be issued in time.
What You Need to Know
You can purchase I-Bonds straight from TreasuryDirect.Gov (legal note: we do not give individual investment advice and that is not an endorsement).
I-Bonds are not a short term investment. You can’t redeem them within 12 months of purchase.
And if you redeem your I-Bonds between 1 and 5 years of purchase, you give up the last 3 months of interest. So for example, if you purchased a bond today and cashed it in after one year, you’d only earn 9-months of interest.
Your interest is not paid out in cash flow, but is instead “compounded” every 6 months and added to your bond. So if you purchased a bond today, your accrued interest would be added to your bond every April and October until you cash out or the bond matures after 30 years.
There is also a $10,000 limit per investor each year, so you can’t necessarily park a ton of cash in I-Bonds… but you can get creative.
Getting Past the $10,000 I-Bonds Limit
Every individual can buy a $10,000 I-Bond.
So if you’re married you can buy two I-Bonds totaling $20,000.
If you have children, you can buy I-Bonds on their behalf. You just need to create a custodial account on Treasury Direct for each child and then purchase up to a $10,000 I-Bond for each.
If you have two kids, you’re now up to $40,000 in I-Bonds.
When you file taxes, you can also fill out Form 8888 to tell the IRS to use your tax refund to purchase an I-Bond for up to $5,000 per person. So if somehow you’re able to get a large tax refund, you can instruct the IRS to buy a $5,000 I-Bond for each member of the family.
In our example, that brings us to $60,000 in I-Bonds.
And we’re not finished.
Businesses can buy I-Bonds for up to $10,000 per year, too. So if you and your spouse each own a business, you can add $20,000 to the running tally — $80,000 in I-Bonds.
Living trusts can buy $10,000 I-Bonds every year, too. So, again, if you and your spouse each have a living trust, add another $20,000.
In total, that’s $100,000 in guaranteed, “nearly risk-free” I-Bonds that are currently earning 9.62%.
Cashing in Your Bond (And, Oh Joy, Paying Taxes)
If you do nothing, your I-Bond will reach maturity in thirty years.
If you’d like to redeem your bond before then, electronic I-Bonds can easily be redeemed through TreasuryDirect.Gov. Redeeming paper bonds is a little more tedious; you will have to follow specific instructions from the U.S. Treasury.
You can redeem just a portion of your I-Bonds if you prefer. Also, remember the 3-month interest penalty you will face if you redeem before the fifth anniversary.
Whenever you redeem, you will need to fill out a tax form to report your interest on your Federal tax return. You can report the interest every year as you earn it, or you can wait to report the interest until you redeem the bond or the bond reaches maturity (whichever happens first). And the interest will be taxed at your normal personal income tax rate.
However, you may be able to avoid paying tax on the interest completely…
If you redeem your I-Bonds to pay for qualified educational expenses for someone in your family (yourself, a spouse or a dependent), and you make less than $155,000 per year, then you may be able to use IRS Form 8815 to make the interest tax-exempt.
This only works if the education expenses were not already paid for with financial aid, scholarships, 529 accounts, Education Savings Accounts (ESAs) or other tax breaks.
So that’s it. If you have extra money you can afford to not touch for a year and want to earn 9.62% for at least the next 6 months, I-Bonds may be the “nearly risk free” solution for you.
Just make sure to purchase your I-Bonds by October 28th to ensure the 9.62% interest rate.
You can visit TreasuryDirect.Gov for more information and instructions for purchasing I-Bonds.
And stay tuned for next week when we bring you Part 2 of 3 Ways to Grow Your Money Right Now.