The Fight Against Low Interest Rates

Written by Firethorn Wealth Partners

August 19, 2021

The ten-year treasury rate, the most important and influential interest rate in the world, peaked at around 1.74% in April. It has since declined to as low as 1.19% in early August. The headlines tell you about the rapid rise in and elevated rates of inflation. However, the reality is that bond yields have seen a significant percentage decline over the last several months. This all leads to continued depressed rates for savers.

Enough of the morbid talk on low rates! This month’s letter is about what we call low hanging fruit at Firethorn. We are adding another no brainer to our list (HSA funding, 401k funding up to company match, backdoor Roth funding, minor Roth IRAs, QCD for RMDs, online savings, etc.) of things an investor should do each and every year.

Series I Savings Bonds, or I Bonds, are currently yielding 3.54%. That rate is guaranteed for the first six months you own the bonds. The rates reset twice a year on May 1 and November 1. Your rate will change every six months from your original date of purchase based on the rates set in May and November. The rate can never be less than 0%. The total rate is actually the combination of a base fixed rate and an inflation rate or adjustment. The interest compounds semiannually.

I Bonds offer a very attractive tax profile as well. The interest is earned free of local and state income tax. An investor has two options when it comes to paying the federal income tax. The tax can either be deferred for the life of the bond, or paid each year. This gives the investor the ability to time or tie the reporting to lower income tax years. The Bonds are safe as they are guaranteed by the US federal government.

I Bonds can be short term or long term investments. They must be held for at least 12 months, but they can earn interest for up to 30 years. Cashing the bonds in before holding for at least 5 years results in the investor forfeiting three months of interest. So, that calculates to a 2.82% (3.54% less three months interest) taxable equivalent yield, remember no state income tax, if the bonds are held as a one year investment. Hmmm, what is the rate you are getting on your 1-year CD (also federally guaranteed)?

Who can invest, and how much can you invest? An individual, a child under the age of 18, or an entity (trust, estate, corporation, or partnership) can buy I Bonds. You are limited to $10,000 annually ( and up to $15,000 with
$5,000 coming from your federal income tax refund). So, a family of four could invest $40,000 annually. Further, the high income earning parents could defer the tax until they retire, but pay tax each year on a child’s interest while they are in a much lower tax bracket.

How to invest? Go to www.treasurydirect.gov to open an account.

In closing, August 10, 2021 marked the three year anniversary of Firethorn. Along the way, there has been some blood, a lot of sweat, and an occasional tear, but we have had a lot of fun these last three years. We cannot thank our clients and families enough. We are excited about the road ahead!