Sullivan: Currently paying 9.62%, I Bonds can be worth the hassle

A guaranteed return of 9.62% should immediately raise suspicion for any average investor. In fact, the Latin phrase “caveat emptor,” which roughly translates to, “let the buyer beware,” comes to mind.

Nevertheless, an annualized rate of 9.62% is exactly what Series I Savings Bonds are currently paying during the current 6-month period. However, the adage, “there is no such thing as a free lunch,” is also apropos, not because the interest rate is too good to be true, but because navigating the purchase of I Bonds can be a lesson in frustration.

So, what is an I Bond? According to TreasuryDirect.gov, I Bonds are a government issued security “that earn interest on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years, or you cash it, whichever comes first.” The fixed rate is set for the life of the bond and since 2008 has been below 1% (currently it is 0%). The inflation rate is reset every 6 months (currently 4.81%) and is based on the Consumer Price Index for all Urban Consumers or CPI-U. Combined, the fixed rate and inflation rate equal the interest paid on an I Bond.

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I Bonds can only be purchased in two ways: 1) up to $10,000 annually can be purchased directly at TreasuryDirect.gov, which is the most common method, and 2) up to $5,000 of paper-issued I Bonds can be purchased with tax refund money each year for any taxpayer. I Bonds must also be held for at least 1 year. After 1 year, they may be liquidated, but if redeemed in less than 5 years, there is a 3-month interest penalty.

An annualized 9.62% interest rate may sound great, and it can be, but here is where the “no free lunch” part can come into play. First, TreasuryDirect.gov can be easy for some individuals or extremely frustrating for others. Nearly every issue requires some form of paperwork to be filled out and mailed in — after it is signed and stamped by a bank officer. If TreasuryDirect is unable to verify someone’s identity when opening an account — paperwork. Want to add or change the bank information linked to an account or typed a number wrong on the original application? More paperwork. Input the wrong password when trying to log on three times and get locked out? Even more paperwork!

In addition, finding a bank that is willing to stamp these forms and is familiar with the process can be a challenge. The form instructions outline what bank seals or stamps are accepted (notarized forms are not acceptable, although online rumors have stated that may change). One local bank has had success simply using a teller stamp, although this is not necessarily listed as an approved method. To compound the issue further, the few banks that offer a corporate stamp typically will not assist someone unless they have been a bank client for at least six months.

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Finally, do not expect to be able to speak to anyone at TreasuryDirect about an issue. While it is possible to call, countless stories abound online about hold times of well over two hours only to have the call dropped before anyone picked up (after nearly this long, my assistant experienced this exact situation).

One bit of information that may make it worth navigating the potential hassles is the ability for some people to boost the dollar amount of purchases significantly. Living trusts and business entities can purchase I Bonds, and gifting I Bonds is possible as well. A couple who each purchased $10,000 of I Bonds, bought $10,000 each as a gift for each other (the gift is completed in a future year) and purchased $10,000 through a living trust can quickly buy $50,000 in I Bonds. If they owned a couple of business entities, this number could be even higher.

Despite the potential frustrations, this is a rare opportunity to earn nearly 10% on an investment with little to no risk. Even if the inflation rate adjusts downward for the next 6-month period (and hopefully it will), it is unlikely it drops drastically. If it does, that just means inflation has cooled, and that is a good thing as well.

Tim Sullivan is the owner of Clarity Financial LLC, a fee-only advisory firm in Columbia, a CFP practitioner and member of the National Association of Personal Financial Advisors and has earned the Enrolled Agent designation from the IRS.

This article originally appeared on Columbia Daily Tribune: Currently paying 9.62%, I Bonds can be worth the hassle