Series I savings bonds exploded in popularity in 2022. Now, as inflation comes down, many are wondering how long to hold onto these new investments, and when it makes sense to change to something better.
Historically, investments within a Roth IRA or traditional IRA have performed better over the long term than I bonds. So if the money you have in I bonds is delegated for long term savings and you are not taking advantage of the annual limit you can save into those tax advantaged retirement accounts, it may make sense to sell your I Bonds to fund those contributions.
There are also tax considerations when selling these bonds that leaves opportunities for tax planning and creating a tax efficient retirement plan.
First, the interest on these bonds is taxed at normal income tax rates by the Federal government, and they aren’t taxed by states. That means that there can be a big opportunity to cash these out during a year you have lower income. If you are retiring next year for example, that can be a great opportunity to take advantage of your lower tax rate.
There is also an opportunity for the interest to be exempt from taxes all together for a select number of households. If the proceeds from the sale of your I Bond is used to pay for any qualified education expenses for you, your spouse, or a beneficiary, the interest will be tax free. Besides actually paying tuition, a contribution to a 529 college savings program also counts as a qualified education expense for this exemption. That gives a lot of families an out for paying taxes on these bonds.
But, this tax break on I bonds for education expenses is available only for those under a certain amount in income. For 2022 that amount was about $158,000 in income for married couples and $100,000 for those who file as single. But, this amount will increase year over year with inflation. Ultimately its important to understand how these savings bonds are taxed, and then look at your financial plan for opportunities on how to redeem these bonds at the opportune time.
We help our clients create these tax efficient retirement plans every day. If you’d like to see how we work with clients and what we can do for you, please reach out and schedule a free meeting with us.
