Roosevelt Investments is now CI Roosevelt Private Wealth

Yield Generating Considerations for Year-End

Yield Generating Considerations for Year-End

Published on December 10th, 2021

Overview

As we speak to our clients, one of the biggest concerns that they focus on is the low interest rate environment of the past few years. Yields have remained at near historical lows across the board for most traditional income products, and it’s becoming increasingly difficult to construct solid income generating portfolios. Low interest rates have incentivized income-starved investors to take on additional risks to generate the yield they require. Inflation has become a source of angst in the investment community as well.

In November of this year, the U.S. Treasury Department began offering a new series of “I Bonds”, which can be purchased directly through the TreasuryDirect website1 . I Bonds are essentially a savings bond that earns interest based on combining a fixed rate and an inflation rate. The combined rate is called a composite rate; simply the combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year. The Composite Rate for I Bonds bought from November 2021 through April 2022 is an annualized 7.12%. This applies for only the first six months after the issue date. This semiannual rate then changes depending on the fixed rate and the inflation rate as measured by the Consumer Price Index.

These bonds are backed by the full faith of the U.S. government and are limited to an annual $10,000 per person. Because of the annual limit, strategically, an individual can purchase the bonds before January 1st and then purchase an additional $10,000 anytime between January 1st and April 30, 2022. A married couple can then receive $40,000 worth of I Bonds and receive the annualized 7.12% Composite Rate for the first six months the bond is held or ~ 3.5% for the first 6 months risk free. The I Bonds can also be purchased for children, grandchildren or using businesses and trusts. An individual purchaser can also elect up to $5,000 from your federal income tax refund to I Bonds, thereby increasing your calendar year limit to $15,000.

We often see opportunities that make sense for some of our clients, but there are few things to keep in mind.

  • A new Composite Rate will be announced on May 1, 2022. There is a likelihood that the rate currently offered will change.
  • The I Bonds are taxed on the federal level but not on the state and local income tax level.
  • I Bonds earn interest for 30 years unless you cash them first. You can cash them after one year. But if you cash them before five years, you lose the previous three months of interest.

If you have any questions or would like our help reviewing your circumstances, please do not hesitate to reach out to us.

1 Source: https://www.treasurydirect.gov/

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