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Utilizing I-Bonds as a Strategic Alternative to 529 College Savings Plans

Utilizing I-Bonds as a Strategic Alternative to 529 College Savings Plans

| April 26, 2022
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The benefits of purchasing government-issued Series I Savings Bonds has started to come into the light recently as a strong fixed-rate alternative to low-yielding money market funds or CD’s.  Right now, if you were to purchase a Series I Savings Bond before the end of April, you would be guaranteed by the federal government an annual return rate of 7.12% for six months followed by an estimated 9.62% annual return rate for the following six months, with interest compounded in semi-annual intervals.  These rates are tied directly to the rate of inflation and re-assessed twice a year in May and November.

There’s an abundant amount of readily available resources weighing the pros and cons of adding I-Bonds to your investment portfolio.  What I’d like to focus on here is specifically why they make an attractive compliment to higher education savings vehicles for your family.

Generally speaking, for parents or guardians looking to establish an investment account geared towards college savings for their loved ones, 529 plans is a popular vehicle for use.  But it’s not the only option that offers potential growth and tax-advantages.

I-Bonds can serve as an amazing compliment to traditional 529 plans as they aren’t taxed at the state or local level and aren’t subject to federal income tax if they are being withdrawn to pay for qualified higher education expenses (as long as your income isn’t above phase out levels).  They’re one of the safest investments available being backed by the federal government and they offer a guaranteed rate of return with compounding interest, which is extremely attractive during times of high market volatility.

Here’s the basics:

  • You must hold your I-Bond for minimally 12 months (it’s an illiquid investment for the first year)
  • If you redeem your I-Bond prior to holding it for 5 years, you’ll forfeit the last 3 months of interest
  • The maximum I-Bond purchase per calendar year is $10,000 per social security number (i.e. if you’re married, you can purchase $10,000/yr and your spouse could also purchase $10,000/yr)
  • The minimum I-Bond purchase is $25 – which means that if you’re currently making systematic contributions to a 529 plan in smaller increments, it’s a very simple shift in after-tax contributions
  • If the rate of inflation drops in the future and I-Bonds no longer seem as attractive as they are today, they can be redeemed and the proceeds can be deposited into existing 529 plans without realizing any tax or penalty

In summary, if you’ve thought about or have already implemented a college savings investment vehicle for your family, consider diversifying your efforts with the extremely low-risk, dependable return of Series I Savings Bonds.  If purchased before the end of April, you can lock in the current annual return rate of 7.12% for six months followed by an estimated 9.62% annual return rate for the following six months.

This is an outside investment and cannot be purchased through Securities America.  If you’re interested in more detailed information or would like to know if I-Bonds are a good fit for your portfolio, please don’t hesitate to contact our office at 716-651-0325. 

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