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I Bonds: Earn 9.62% Interest, Guaranteed and without Risk, Possibly Tax-Free - YouTube
Channel: WCS Money Tutorials
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Welcome to WCS Money Tutorials.
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Todayās topic is United States Savings Bonds.
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Earn a guaranteed 9.62% interest rate, without
risk, which is not subject to state or local
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taxes, and I will show you how they can be
free of federal taxes.
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Savings bonds are issued by the United States
government.
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Interest is added to the bond at the start
of each month, much like a savings account,
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which is why they are called savings bonds.
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Savings bonds are non-marketable securities,
so they cannot be sold.
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Instead, both the principal and interest are
paid at maturity or when the bond is redeemed.
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The maximum term is 30 years.
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Thereafter, no additional interest is earned.
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They can be purchased commission-freeĀ
at TreasuryDirect.gov.
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There are 2 types of savings bonds: Series
I and Series EE.
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Series EE bonds pay a fixed, low rate of interest.
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Series I bonds pays an interest rate that
is part fixed and part variable.
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Currently, the fixed portion is 0%, so there
is only a variable portion.
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In May 2022, the interest rate for Series
I bonds was 9.62%, much higher than the Series
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EE bonds.
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Besides the low interest rate, Series EE bonds
have no advantages over I bonds, so there
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is no reason ever to buy them.
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I will not discuss anything more about EE bonds,
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but you can learn more aboutĀ
them at TreasuryDirect.
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The interest rate of an I bond is a composite
of a fixed rate and a variable rate based
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on inflation.
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Both the fixed rate and the variable-rate
are set twice annually by the U.S. Treasury
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on the 1st business day of May and November.
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The fixed rate for individual bonds does not
change over their 30-year life.
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The variable-rate is based on the semi-annual
inflation rate over the previous 6 months
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for which inflation data is available.
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The variable-rate applies to all outstanding
I bonds for 6 months regardless of the issue
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date, even if the government sets a new rate
during the 6-month term in the bond.
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Interest is added to the account at the start
of each month, but the added interest does
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not earn additional interest until the next
6-month period after the issue date.
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Therefore, interest is compounded semiannually
from the bondās issue date.
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However, you earn a full month of interest
if you own the bond for any part of a month.
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If the bond is redeemed within 5 years, then
3 months of interest is forfeited.
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This is the formula for figuring the composite
interest rate.
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Currently, since the fixed rate is 0, the
composite rate consists only of the semi-annual
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inflation rate, which is annualized to make
it easy to compare to other investment returns.
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The equation for the composite rate has 2
terms based on the fixed rate, but the last
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term does not add much.
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However, when they become available, buying
I bonds with a higher fixed rate, even if
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the inflation component is lower, may be a
good investment since the fixed rate never
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declines over the 30-year life of the bond.
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The fixed rate was as high as 3.6% on bonds
purchased from May to October 2000.
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These bonds are now earning more than 10%!
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Here is an example in how interest rates are
applied to your bonds.
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You buy a bond on April 1, 2022, when new
bonds earned 7.12%.
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This interest rate applies to your bond for
6 months.
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The next month, the federal government sets
the new interest rate for new bonds on May
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1, 2022, to 9.62%, but you continue to earn
7.12%.
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At the end of 6 months after your purchase,
October 1, 2022, the interest added to your
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principal starts earning interest.
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So interest is compounded semiannually.
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The new 9.62% interest rate set for new bonds
applies to your bond at the start of October
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2022 to the end of March 2023 regardless of
the new interest rate that will be set on
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November 1, 2022.
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Your bond will start to earn that interest
in April 2023 for the following 6 months.
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And so on.
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(Interest rates are annualized.)
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Bonds are not subject toĀ
either state or local taxes.
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However, bonds may be subject to federal taxes,
but there are ways to minimize or even avoid
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federal taxes.
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Taxes can be saved for children even if the
proceeds are not used to pay for educational
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expenses.
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By putting the bonds in the childās name
only and filing a tax return for the child
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and electing to report the interest annually,
the childās tax rate will apply to the childās
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income, so if it is less than the standard
deduction for children with investment income,
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then there is no tax.
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When the bond matures, the child receives
the proceeds tax-free.
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However, if the child receives significant
income, then kiddie tax rules may apply.
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In this case, taxes on the interest may be
deferred until the bonds are redeemed, when
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the interest will be taxed at the childās
rate if she is at least 19 years old, or 24
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years old if she is a full-time student.
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Redemptions for younger children will be subject
to the kiddie tax rules.
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Co-owners must pay any taxes on bond interest
when the bonds are redeemed that is proportional
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to the amount of money they contributed to
the purchase price.
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So if a father pays 75% of a savings bond
for his daughter, who then redeems it 20 years
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later for the full amount, then he must pay
75% of any tax on the interest.
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Federal taxes can also be avoided on interest
used to pay for qualified educational expenses.
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To receive this tax-free treatment, the following
requirements must be satisfied:
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If a bond is used to pay for your educational
expenses, then you must be the owner of the bond.
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To pay expenses for your childās education,
then you or your spouse, or both, must own
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the bond.
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Your child may be aĀ
beneficiary but not a co-owner.
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There are also some redemption requirements,
the primary requirement being that the educational
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expenses must be incurred in the same
tax year the bonds are redeemed.
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Form 8815 must be filed to exclude interest
that was used to pay for qualified higher
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education expenses.
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The tax savings for the educational bond program
is limited by income, specifically modified
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adjusted gross income, or MAGI.
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MAGI = taxable income + additional income
that would otherwise be excluded or deducted
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when calculating normal tax liability.
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For instance, IRA deductions would have to
be added back to taxable income.
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The income limits phase out over a range of $15,000,
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or $30,000 for married couples filing jointly.
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The phaseout starts at $85,800.
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Joint filers have a higher range.
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These MAGI limits depend on the tax year when
the bonds are redeemed, not when they are purchased.
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This screen shows the formula and an example
for calculating the tax-free portions of bond
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redemptions if MAGI exceeds the phaseout threshold
but is still below the phaseout limit.
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Simply multiply the redemption amount by the
amount your MAGI exceeds the phaseout threshold
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divided by the phaseout range, then subtract
that from the redemption amount.
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If the bond proceeds exceed qualified educational
expenses, then this formula determines how
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much of the interest is tax-free.
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The tax-free interest equals the percentage
of the interest equal to the percentage of
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qualified educational expenses over the total
bond redemption amount.
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This screen also shows 2 color-coded examples
on how to calculate the tax-free portion of
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redemptions.
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For any calendar year, these are the limits
on the acquisition of savings bonds per recipient:
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ā¢ $10,000 in electronic I bonds.
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ā¢ $5000 in paper I bonds.
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Business entities, trusts, and estates, including
living trusts and estates, can purchase up
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to $10,000 of electronic I bonds.
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These limits apply to each individual or entity
per calendar year whether the bonds are purchased
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or received as a gift.
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There is no limit to buying bonds as gifts
for other individuals, but the total value
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of bonds received by the recipient cannot
exceed the above limits for the calendar year.
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There are some exceptions to limits on bond
acquisitions.
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The primary exception is that bonds transferred
to you because of the death of the original
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owner do not count toward your limit.
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As stated earlier, bonds cannot be sold.
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Instead, they are redeemedĀ
by the federal government.
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Bonds must be held for a minimum of 1 year.
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If redeemed before 5 years, then the last
3 months of interest is forfeited.
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However, this penalty can be mitigated by
buying right before the end of the month and
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selling right after the beginning of the month,
since you earn a full month of interest
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if you owned the bond forĀ
any portion of the month.
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A bond must be registered.
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Registering the bond determines who owns the
bond and who can redeem it.
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The owner can specify a beneficiary, who must
be a person, who will receive the bond if
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the owner dies.
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A bond may have another owner, but if one
owner is a person, the other cannot be an entity.
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Either owner of a co-owned paper bond may
cash the bond without the approval of the
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other owner, but most other transactions require
the signature of both owners.
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If one owner of a co-owned bond dies, then
the other owner becomes the sole owner.
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Paper bonds are sold in these 5 denominations.
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These bonds must be purchased in multiples
of $50, since that is the smallest denomination.
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The per calendar year limitĀ
is $5000 per tax return.
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You can only buy paper bonds with your tax
refund, which is limited to the lesser of
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$5000 or your tax refund, by filling out
Part 2 of Form 8888, Allocation of Refund.
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You do not need to open a TreasuryDirect account;
just follow the instructions on Form 8888.
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Once your tax return hasĀ
been processed by the IRS,
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your paper savings bonds will be mailed to you.
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You can buy paper bonds for yourself and 2
other individuals, but the total purchase
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cannot exceed the lower ofĀ
your tax refund or $5000.
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You can also designate co-owners or beneficiaries
for the other individuals.
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Designate someone as a beneficiary
by checking the appropriate box.
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You can redeem paper I bonds at some
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local financial institutions or by mail.
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To redeem by mail, use FS Form 1522.
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If your paper I bonds are lost or destroyed,Ā
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then you can easily replaceĀ
them with an electronic
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bond in your TreasuryDirect account or receive
payment for the lost bonds.
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The paper bonds are thenĀ
invalidated by TreasuryDirect.
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Individuals are limited to receiving $10,000
of electronic bonds and $5000 of paper bonds,
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but you could buy much more than this for
your family or if you have various entities,
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such as a limited liability company or a trust.
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Remember that each tax return is limited to
$5000 of paper I bonds, so if you are married
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and file jointly, then $5000 is your limit,
but if you file separately, then your spouse
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can also buy $5000 of paper bonds,
for a total of $10,000.
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You can also add up to $10,000 for each entity
that you own or control.
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Remember that all of theseĀ
limits are per calendar year.
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To buy bonds commission-freeĀ
at TreasuryDirect.gov,Ā
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you must set up an account.
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Go to website and select the tab for Individuals.
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Click the link to open the account.
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Click on the link to TreasuryDirect.
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This shows you a summary of the 3 steps you
must take to establish an account.
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To get started, click on the APPLY NOW button.
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The only thing you will need to open an account
is your personal information, your Social
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Security number, a checking or savings account,
and an email address.
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Enter your name, Social Security number, and
the other requested personal information.
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Enter your banking information and email address.
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Click the checkbox to certify certain information.
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Review the information to ensure
that it is correct.
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Then click SUBMIT.
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Choose a personalized image or caption that
will help to verify that you are on the authentic
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TreasuryDirect website.
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Choose a password.
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And the answers to at least 3 security questions.
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Then click SUBMIT.
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Then you reach the final screen thanking you
for opening an account.
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You can also give bonds as gifts.
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To give an electronic bond as a gift, you
must know the recipients full name, Social
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Security or taxpayer-identification number,
and their TreasuryDirect account number.
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TreasuryDirect also provides 2 videos on buyingĀ
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and delivering gifts, as wellĀ
as a step-by-step tip sheet.
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You deliver your gifts with the TreasuryDirect
tools for giving gifts.
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Here you can see the screen forĀ
the delivery request details.
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This is the details screenĀ
for the delivery request.
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You can get more information
on giving gifts from TreasuryDirect.
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TreasuryDirect has good videos on how to use
their website and how to do the most common
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tasks, such as setting an account
and how to buy bonds.
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Just search for TreasuryDirect videos,
then click the appropriate link.
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You can see their current selection here,
which will be expanded in the future.
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Each video is only 2 minutes long.
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Topics include setting up an individual account,
setting up a entity trust account or a corporate
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entity account, how to buy and deliver savings
bonds as gifts, how to reset your password,
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and how to edit your bank account information
in TreasuryDirect, as well as other topics.
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Thank you very much for your time.
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If you liked my video, please SUBSCRIBE!
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I would appreciate any suggestions, so please
leave them in the comments below.
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Check out my website at https://thismatter.com
for more than 850 in-depth fundamental tutorials
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on personal finance, investments, and economics.
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Check out my books on money atĀ
https://williamspaulding.com.
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Thank you.
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