Series I bonds are a tempting proposition for investors looking for protection against inflation. The government bonds currently pay a solid yield of 5.27 percent. And that figure is adjusted for inflation, so if prices rise even further, investors could earn a higher rate than what they’re getting now. Not surprisingly, this inflation protection has made Series I bonds attractive to savvy investors.
“There’s one place you can hide from inflation: Series I bonds,” says Don Parker, former Chief Risk Officer and Chief Information Officer at BOK Financial.
The main drawback is that individuals are limited to purchasing $10,000 worth of Series I bonds each year. But individual investors actually have a way around this limit, allowing them to double or even triple (or more) their investment in Series I bonds, but almost no one knows about it.
Here’s how else you can invest in Series I bonds and other little-known secrets of these bonds. (If you already know you want to buy Series I bonds, here’s how to buy them.)
The secret to investing more in Series I bonds
Series I bonds can be a very attractive investment right now, but let’s recap why before we show you how to buy more than the typical $10,000 annual limit.
The Series I bond currently pays 5.27 percent interest, with interest rates adjusted semiannually in May and November. If inflation rises, the bond has a variable component that increases the bond’s yield. Of course, it also works the other way around, and interest rates have fallen from 9.62 percent last year as inflation slowed somewhat. Additionally, investors only pay taxes at the federal level and can legally avoid state and local taxes on Series I bonds. And with the support of the US government, investors can now invest as safely as there is.
“The Series I bond is risk-free,” says Parker. “There is no headline risk here regardless of where interest rates go.”
“And the percentage never goes below zero,” he says. “There is an interest rate cap at the bottom and no interest rate cap at the top, so your principal is perfectly protected against inflation.”
Typically, you are limited to purchasing $10,000 per person in Series I electronic bonds per year. However, the government allows those with a federal tax refund to invest up to $5,000 of that refund in paper I bonds. So most investors think their annual investment will end up being $15,000 – one of the main myths of I Bond.
But that’s not true, and investors could invest tens of thousands more, Parker and others say.
“The $10,000 limit applies per entity, not per person,” Parker said. “You can have as many entities as you want.”
That is, if you own a business, that business can also purchase Series I bonds up to an annual limit of $10,000. That works if you have a sole proprietorship or even a side business. It can also include other types of entities, such as trusts or even limited liability companies (LLCs). An LLC is a popular way among landlords to legally organize a series of rental properties.
“In many states there are inexpensive ways to set up an LLC,” says Parker. “And that LLC is a separate entity from you, even if you share the Social Security number and a bank account.”
For example, Parker outlines a way you can open many LLCs for a small fee. You can then go to TreasuryDirect – the site where you can buy government bonds directly – and open an account for the entity. Buy the maximum amount of $10,000 in each account and enjoy risk-free income.
Parker says it’s not even necessary to get a separate tax ID number (also called an EIN) for each entity. But other experts disagree and say it’s important that the company is clearly separated from you as an individual.
A tax ID number for the business is critical, says Morris Armstrong, a registered investment advisor at his own firm in Cheshire, Connecticut. He says the Treasury Department looks at these accounts through EIN, but in principle there is no problem with having multiple entities and maximizing each entity.
“There would be nothing to stop someone from setting up multiple trusts and doing so, other than the cost,” Armstrong says.
Parker says that between opening the LLC and then setting up the account for the entity on TreasuryDirect and funding it, it should take less than 10 minutes total. He thinks the opportunity will be especially interesting until 2024 or 2025.
Armstrong is a little less optimistic, but does say that “after a year it could be a pretty attractive deal” if you add in the costs of setting everything up.
Risks of Buying Multiple Series I Bonds
Investors who wish to use this method must keep good records documenting all entities they use to purchase Series I bonds. You need to be organized and keep track of account numbers for each entity you use. And if you don’t set up separate tax numbers for each company, even if you form an LLC, you may run the risk of being sued by the Treasury.
Parker himself has used this approach to set up multiple LLCs and buy up to the $10,000 limit for each entity. His strategy was noticed by Treasury Department officials, who wondered how he had purchased so many Series I bonds in one year and were suspicious that these LLCs actually existed. Parker says he showed them the proper legal paperwork validating them.
If you’re looking to set up multiple LLCs, it may be worth shopping around to see which state offers the lowest fees. Not all states charge the same amount, says Parker, who highlights Michigan as a state that charges relatively little to form the legal entity. You want to keep costs low so you don’t eat away at your returns, but Parker says you can set one up for $50 if you look carefully.
Of course, there are other problems with investing significant amounts of money in one type of bond. Although the Series I bond eliminates principal risk and inflation risk, investors must tie up their money for at least a year. You simply cannot sell the bond before then. So if there’s a chance you’ll need the money within a year, then the Series I bond isn’t for you.
And if you sell the bond within five years of purchasing it, you’ll have to pay a penalty of three months’ interest. However, if inflation decreases, so will that penalty. Of course, if inflation falls to more normal levels, Series I bonds will also become much less attractive.
“I think there’s a lot of buzz about the I-bonds, which weren’t a major instrument until inflation hit hard, and now people want in,” Armstrong says.
Before embarking on this approach, it may be worthwhile to consult a financial advisor so that you have all the details in order and fully understand the risks.
In short
Series I bonds are an attractive investment option right now. Investors who want to take advantage of their high returns should act quickly so they can take advantage of the interest rates currently on offer. However, few investors expect inflation to suddenly come to a halt, giving you an extended period of high interest rates with a low-risk government bond.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
