Experts answer three tough questions about first chain links

Series I bonds, an inflation-protected and virtually risk-free asset, are in high demand as investors seek shelter from rising prices and stock market volatility.

While Annual inflation rose 8.6% in May – Highest rate in more than four decades, according to the US Department of Labor – Bonds are currently paying 9.62% annual rate until October.

This is especially attractive after about six months of Standard & Poor’s 500Which has fallen more than 20% since last January Worst start for six months to a year since 1970.

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In fact, since the annual bond rate jumped to 7.12% in November, 1.85 million new savings bond accounts were opened as of June 24, according to Treasury officials.

“i Bonds are a great tool for both cash reserves and investment portfolios,” said certified financial planner Berk Sestock, co-owner of Rights Wealth Partners in Harrison, New York.

With the support of the US government, the bonds will not lose their value. He said that if you are comfortable with not touching the money for 12 months, the current rate “dwarfs” other options for cash reserves.

However, there are nuances to consider before piling money into these assets. Here are answers to some of the more difficult questions.

1. How does the interest rate on I bonds work?

Bond yields consist of two parts: a fixed rate and a variable rate, which changes every six months based on the consumer price index. The US Treasury announces new rates on the first working day of May and November of each year.

With inflation rising over the past year, variable rates have jumped, increasing to 7.12% annual rate for the month of November And the 9.62% in May. However, the initial six-month price window depends on the date of purchase.

For example, if you buy I bonds on July 1, you will get an annual rate of 9.62% through December 31, 2022. After that, you will start earning the annual rate announced in November.

2. How do I pay taxes on bond interest?

While I avoid the interest of state and local tax bonds, you are still in a federal tax bind.

There are two options to cover the bill: report the interest each year on your tax return or defer until the I bond is redeemed.

While most people put off, the choice depends on several factors, explained Tommy Lucas, a CFP agent and registrar at Moisand Fitzgerald Tamayo in Orlando, Florida.

All these decisions come back to the ultimate purpose of this investment.

Tommy Lucas

Financial advisor at Moisand Fitzgerald Tamayo

For example, if you choose to pay taxes on your bond interest each year before you receive the proceeds, you’ll need another source of income to cover those fees.

However, if you have allocated this money to Pay the tuition feesHe said the interest is tax-deductible, so paying levies annually doesn’t make sense.

“All of these decisions come down to the ultimate purpose of this investment,” Lucas added.

3. What happens to my bonds if I die?

When you create a file TreasuryDirect account to buy I . bondsit is important to add what is known as the designation of the beneficiary, and to name who will inherit the assets if she dies.

Without this designation, Sestock explained, it becomes difficult for loved ones to collect I bonds, and may require time and expenses through the probate court, depending on the amount of the I bond.

“Personally, I make sure my clients do it right in the first place,” he said, explaining how adding patrons in advance can avoid headaches later.

However, if you have set up an account without a beneficiary, you can add an account online by following the steps shown here At TreasuryDirect. You can contact support with questions, but they are currently experiencing a “higher than normal call volume,” According to the site.

With the specified beneficiary, I can continue to hold the asset, cash it or reissue it in its name, According to Treasury Direct.

Interest accrued until the date of death can be added to the original owner’s final tax return or heir’s deposit. Either way, the beneficiary can decide whether or not to continue deferring the interest, Lucas said.

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