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This article is about strategies which involve buying I Bonds as Gifts. It doesn’t work as a trick to buy more I Bonds than the $10K calendar year limit. There is a special situation, however, in which it can be used to boost returns over the long run.
US Treasury I Bonds are clearly a great inflation investment. They are certainly the best in risk-adjusted terms because the risk is zero. The catch is that you just can’t put as much into them as you may wish. They are limited to $10,000 per year per Social Security Number plus up to $5000 which you can request from your tax refund. I have harped on the virtues of I Bonds enough with four articles in the past year and felt that my job was pretty much done when I had finished reading the more than 300 reader comments and replied to almost all of them. I was wrong.
The comments and the questions raised by readers were excellent. The most interesting theme came from several commenters who raised the possibility of buying more I Bonds annually by some tricky uses of the Gift Box on the site. I was tempted to dismiss the idea as disallowed by the rule of $10K per Social Security Number, but the more I thought about it the more I saw that I needed to do some research and get a definitive answer. I did that.
First the bad news: the short answer is that the Gift Box cannot work to buy more I Bonds in a given Social Security Number in a given calendar year. You and your wife or husband, for example, cannot exchange Gifts and thus double the amount you buy in a given calendar year. The rule is that you must buy and ultimately deliver the gift to a particular individual with a Social Security Number and an established account. If the individual has already purchased $10K in a given year the Gift delivery will not be allowed. If the Gift has been delivered in a particular year, the individual will not be allowed to buy another $10K. Sorry. That effort to double up won’t work.
There are a couple of workarounds including buying in an irrevocable trust or in one’s personal business. I had initially been tempted to dismiss these approaches too but they can also work. I won’t discuss them in this article because both are complex and laborious and require enough time that they would be hard to set up in a timely fashion to execute an April purchase. There will be six months until the next rate reset and I commit to researching and publishing an article on both of these options within that period.
As for a strategy using Gifts, you can do it today once you understand how it works. It’s not generally necessary to use the Gift option for children and grandchildren. You can do this by setting up an account for children under 18 and funding them and enabling your children to do so for grandchildren. There is one paired solution that works well, however. That’s a reciprocal arrangement between yourself and your partner. You still can’t do anything that adds more than $10K per SSN in a single year, but there is a special situation in which A Gift may serve to greatly enhance return. The idea – adding I Bonds during a period in which inflation rates are unusually high – popped into my head as soon as I understood the possibilities the TreasuryDirect site offered. Several sites helped me get an understanding of the mechanics. I owe a special shout-out to Harry at The Finance Buff who wrote cogently about I Bond Gifting in this piece. You should read it. I also owe thanks to AlanS9 whose comment following my next to last I Bond article called my attention to thefinancebuff.
The Big Idea: Super High Inflation Suggests A Great Strategy
In the year 2000, I got lucky. That’s the year the dot.com fiasco peaked and crashed. I was never a believer in the dot.com stocks and had cash on my hands. I Bonds came into existence in 1998 and I had thought about them more and more. At that point, you could buy $30,000 per SSN per year and the fixed rate had been casually set at 3.6%. The Treasury quickly caught on to the fact that both these numbers were too generous and reduced the max to $10K and started setting fixed rates close to the 5-year T Note rate, but I had bought the full $30K in 2000 and a good bit more in 2001. My average fixed rate was then a little more than 3.5%.
In 2000 the inflation rate was 3.4% for the year, pretty darn good, so I collected 7% for the year. The next year the fixed rate dropped a little to 3.4% and the rate dropped to 1.6%, still a highly satisfactory 5% as the equity world was falling apart. After that, the inflation rate settled in around 2% which has been its natural tendency over the past two decades. (Since 1914, the first year of good numbers, it has been 3.4%, but demographics suggest that the tendency may be nearer 2% in the future.) I kept buying I Bonds at the new max of $10K and fixed rates which were often zero and never more than 0.3%.
After a few years, I started checking to see how much my average fixed rate had fallen. What I learned was that the first two gangbuster years continued to overpower the subsequent years at $10K and zero fixed. The last time I did the numbers my personal average fixed rate was still well over 2% and the I Bonds bought in the first year would soon have quadrupled in value.
That’s where the obvious idea popped into my head. When rates were super high, as they are today, it’s a great time to have loaded up to the max. Your future numbers for a $10,000 investment today will be compounding within a year from a base of $10,853. If you start at that point you are way ahead of the long-term game as well as having a chance to park money at the 8.53% rate for a year which is likely to beat anything safe that comes along. If you can find a way to double up today, you are off to the races.
Nobody knows how long inflation will remain super high. The Fed definitely missed it. I won’t even guess. What I do know is that inflation at this level always goes away. The Fed will eventually get its way even if that produces a recession. What the market says (you get this by subtracting the negative TIPS yield from the straight Treasury yield of the same maturity) is that average inflation for the next five years will be 3.42% and for 10 years will be 2.95%. With much higher inflation numbers baked into the cake right now, the clear implication is that the inflation rate will fall enough at some point in both five and ten years to drag the average for each period down. The one extended streak was in the 1970s with four years of super high inflation after World War I and two single years during and after World War II. If that sort of long-term inflation persists you will be even happier to stash I Bonds reciprocally in a Gift Box with your partner. You will in fact want to keep doing it in the last month when each reset is known to continue the inflation trend.
What we do know is that super high inflation eventually subsides. Since 2000 there have been two years, 2014 and 2015, when inflation was less than 1%. Here’s the trick. With your partner, you buy the I Bonds as Gifts now and wait for a year with low inflation like 2014 and 2015 and deliver them to each other. That year both of you skip your annual purchase. Meanwhile, both of you have compounded your money starting with the present superb rate. To do all this you just go to the TreasuryDirect site and figure out what you have to do.
Partner To Partner, Purchase To Delivery
My wife and I are doing this. A transaction between husbands and wives, partner and partners, is ideal to take advantage of the gift maneuver. Each makes the mirror image gift to the other. It’s a benefit that comes with family or a relationship based on trust and common goals.
What makes this maneuver work is the fact that Purchase and Delivery are separate operations. First, you buy whenever you wish. The optimal time is right now. That’s as soon as you finish this article and have a chance to think it over and read the link above for reassurance and reinforcement. You want to buy before the ongoing annualized rate of 7.12% goes away with the May 1 reset. Start the process within a few days in case the processing is sluggish or you encounter some kind of problem. Why now? The May 1 reset will rise to 9.62% so why not wait? The reason is that after six months, you will get that anyway. You don’t want to let the 7.12% get away because you know it’s pretty sure that within a few years rates will be lower. You want to snag the high return on the front end. I have harped on this in all previous articles. Remember my eureka moment on the I Bonds I bought in 2000. It’s great to start with a bang.
When you buy you must provide the recipient’s name and Social Security Number. As long as the I Bonds remain in a Gift Box neither the donor nor the recipient can cash them. That can happen only after delivery. Fortunately, however, the I Bonds held in a Gift Box begin accruing and compounding interest immediately. You want immediately to mean before the end of April. The bonds will go forward with compounding indefinitely until the bonds are delivered, at which time the recipient can choose to let them continue compounding or cash them in. In the year the Gift is delivered the recipient will not be able to buy I Bonds directly – at least, to put this exactly, so that the sum received and bought exceeds $10K. You will have chosen a year with a lower rate.
Gift purchases do not count against the amount you can buy for yourself. You may buy as much as you wish for any recipient in separate purchases of $10K at any time. It’s Delivery that is restricted. If you buy more than $10K for any single recipient, you will not be able to deliver more than $10K to that recipient in any single year. The holding period before you can cash in begins with the time the bond is purchased. If the bond has been delivered, it can be cashed in by the recipient starting one year after the date that it was purchased.
One more detail. You can designate a second owner or beneficiary for the I Bonds you buy as a gift, but you cannot designate yourself as a second owner. You can, however, designate yourself as a beneficiary.
The TreasuryDirect site includes helpful links on How To Add A Joint Owner Or Change A Beneficiary on I Bonds, Purchasing a Gift Bond, and Delivering a Gift Bond. Because the process is inherently a bit complicated it’s easy to make a mistake. Take it slow and read the details. In the Gift Bond video be sure to check the Dropdown to the Gift Registration because it does not switch automatically and you don’t want to assign the bond to yourself. Check your work as you would have done with a math test in high school.
The procedure on simply buying is not exactly simple, and my comments section showed me that clearly intelligent people still had some problems with it. My own initial purchases were done at banks, and even there I checked and rechecked, and my first purchase after TreasuryDirect went to electronic-only was a one-hour nightmare. The second time through was simple. My wife had a fit with her first purchase after changing banks. The Gift stratagem proposed her is about one standard deviation tougher. The devil is in the details, but it’s often that way with safe and assured profit. Even so, a smart 12-year-old could probably do it, maybe better than I will Bear with it and ask questions in your comments. As you see, I do my best to answer all comments fully.
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