How to throw more money at an inflation hedge with this year-end hack
Susan Tompor, Detroit Free Press
7 min read
Sticker shock at the grocery store isn't going to disappear when the calendar flips into the new year. So if you can't beat inflation, you might as well hedge your bets.
And there's a year-end strategy that's been building buzz now that inflation-indexed savings bonds are paying an annualized rate of 7.12% for the six-month period after you buy the bonds. That rate is good for I Bonds bought from Nov. 1 through April 30, 2022.
The 7.12% annualized rate for the bonds is turning heads, given that many yields for a one-year certificate of deposit remain below 1%.
What's the year-end trick?
I Bonds are an option for those who want to park some money in a relatively low-risk spot for one year or more. If inflation rises in the months ahead, the rate could even adjust and go higher for a time.
The trick here focuses on a limit for how much you can invest in I Bonds in a given calendar year.
Each year, you only can buy up to $10,000 in electronic I Bonds or $20,000 per married couple. You buy savings bonds at www.TreasuryDirect.gov and hold them in an online account.
Once we move into 2022, an individual can buy another batch of I Bonds, up to $10,000 each or up to $20,000 per couple.
It means that a married couple could purchase up to $40,000 of I Bonds over a month or so, according to Dan Pederson, a certified financial planner and president of The Savings Bond Informer.
If you haven't bought any I Bonds in 2021, savers are effectively able to double the annual purchase limit within a short window by buying bonds before end of 2021 and again early in 2022.
Even if you bought some I Bonds this year, as many people have, you could make sure to go up to that annual limit by Dec. 29.
A key tip: You can't wait until Dec. 31. That's a holiday this year for many banks and a federal holiday because Jan. 1 is a Saturday. Dec. 30 isn't going to cut it, either, to count as a 2021 purchase.
"The transaction would need to be processed this year before the end of this month," according to John Rizzo, senior spokesperson, public affairs for the U.S. Department of the Treasury.
He noted that it takes 24 hours for transactions to process because of the Automated Clearing House process.
"If a customer places a purchase this year on the deadline Dec. 29, it will post on Dec. 30," Rizzo said.
But if you'd buy on Dec. 30, the transaction won't post on Dec. 31 because that's a federal holiday.
Buying on or before Dec. 29 and then again in early 2022 would enable someone to obtain I Bonds at the 7.12% annualized rate for the first six months after buying the bonds.
Series I savings bonds are now only available in paper form if you use your income tax refund to buy the bonds and fill out IRS Form 8888 when you file your tax return. In any single calendar year, you can buy up to a total of $5,000 of paper I Bonds using your federal income tax refund. Series I savings bonds are also available in electronic format.
The semiannual inflation rate is 3.56% and the fixed rate on the bond is 0%. The bond's interest rate over time would go up or down based on inflation.
Remember, it's a 0% fixed rate, Pederson said, so this play is based on the inflation component only.
Many older I Bonds issued years ago will do even better as they were issued with a fixed rate that's well above 0%. I Bonds bought in 2000, for example, had a fixed rate of 3.4% or 3.6%, depending on when you bought the bonds. You'd get that fixed rate — plus the new inflation rate.
I Bonds earn interest for 30 years unless you cash them first.
Buying as many I Bonds as allowed in 2021, though, could help savers get a decent rate for at least 12 months, given what's expected of inflation ahead.
At this point, we'd be just guessing as to what the inflation rate would be when the new six-month rates are announced May 1. But it does look better than average.
"We have two of the rates so far and they are running at an annual pace of slightly more than 10%," Pederson said.
There are four more monthly rates to go — December, January, February and March. The Consumer Price Index for All Urban Consumers is published every month and the I Bond rate reflects that index.
Pederson said if the last four monthly rates for the CPI-U average 0.5% then the May 1 rate would be at about 7.2%. If rates average higher than that — say 0.9% -- the next I Bond inflation rate would be more than 10%, he said.
Right now, it appears as if the May 1 rate could be similar to the current rate or maybe higher, which would help savers lock up a decent rate for one year at least.
The I Bond rate is set twice a year, as of Nov. 1 and May 1, each year.
By comparison, I Bonds issued from May through October have an annualized rate of 3.54%, good for six months, thanks to an uptick in inflation. The higher rate — available on bonds bought from Nov. 1 through April 30 — would kick in for bonds bought earlier this year six months after the original purchase.
Even that 3.54% rate was substantially higher than rates when inflation was low.
For example, those who bought a new I Bond from May 2020 through October 2020 started out receiving 1.06% for the first six months of those bonds. But they are receiving the higher rates now, too, based on inflation adjustments.
One big stumbling block for I Bonds: You're going to have to wait one year at least to cash out of a new I Bond. This isn't like a checking account where you can easily tap into the money.
If you buy I Bonds now but need that money in March or April, you're not going to be able to tap into that savings to cover bills or expenses.
And you'd lose out on the last three months of interest on your I Bonds if you redeem a bond within the first five years of buying it. But the current rate, experts say, may be attractive enough to even lose a bit of interest if you need to sell the bonds in two or three years.
As we approach tax season next year, it's also good to realize that you can use your tax refund money to buy paper I Bonds.
In any single calendar year, the TreasuryDirect site notes, you can buy up to a total of $5,000 of paper I Bonds using your refund. Paper I Bonds are issued in denominations of $50, $100, $200, $500, and $1,000.
When you file your tax return, you would include IRS Form 8888 to use tax refund money toward I Bonds.
The $5,000 annual limit for I Bond purchases made with tax refund money is on top of the annual limit of $10,000 for individuals and $20,000 for married couples for I Bonds bought online at TreasuryDirect.gov.
