I bonds are a type of U.S. savings bond that earns interest based on inflation. They are a safe and low-risk investment that can protect your money from losing value over time. However, buying I bonds can be tricky, especially if you make a mistake in the amount or the payment method. In this article, I will explain what I bonds are, how they work, and how to correct a common error that some investors make when buying them.
What are I bonds and how do they work?
I bonds are issued by the U.S. Treasury and can be bought online through the TreasuryDirect website. They have a minimum purchase amount of $25 and a maximum annual limit of $10,000 per person. You can also buy up to $5,000 worth of paper I bonds with your IRS tax refund, increasing the total limit to $15,000 per person.
I bonds earn interest monthly and compound semiannually. The interest rate consists of two components: a fixed rate and a variable rate. The fixed rate is determined at the time of purchase and never changes. The variable rate is adjusted every six months based on the inflation rate. The current interest rate for I bonds issued from November 1, 2023 to April 30, 2024 is 5.27%, which includes a fixed rate of 1.30% and a variable rate of 3.97%.
I bonds have a maturity period of 30 years, which means they stop earning interest after that time. You can cash in your I bonds anytime after 12 months, but if you do so within the first five years, you will lose the last three months of interest as a penalty. You can also defer paying federal income tax on the interest until you redeem the bonds or they mature, whichever comes first. I bonds are exempt from state and local income taxes, but not from federal estate, gift, or excise taxes.
How to correct a mistake when buying I bonds?
One of the most common mistakes that investors make when buying I bonds is entering the wrong amount or using the wrong bank account. For example, you may have intended to buy $10,000 worth of I bonds, but you accidentally typed $10,000.01 or used a bank account that only had a few cents. In this case, your purchase will not go through, and you will receive an error message from TreasuryDirect.
To correct this mistake, you need to cancel your purchase and start over. Here are the steps to follow:
- Log in to your TreasuryDirect account and go to ManageDirect.
- Click on Pending Purchases under Manage My Securities.
- Find the purchase that you want to cancel and click on Cancel.
- Confirm that you want to cancel the purchase and click on Submit.
- You will receive a confirmation message that your purchase has been canceled.
- Go back to BuyDirect and start a new purchase with the correct amount and bank account.
If you do not cancel your purchase within 24 hours, it will be automatically canceled by TreasuryDirect. However, it is better to cancel it as soon as possible to avoid any confusion or delay.
How to properly buy I bonds?
To avoid making mistakes when buying I bonds, you should follow these tips:
- Check the current interest rate and the annual purchase limit before you buy I bonds. You can find this information on the TreasuryDirect website or on other reliable sources.
- Plan ahead and decide how much you want to invest in I bonds and how often. You can buy I bonds once a month, once every six months, or once a year, depending on your preference and budget.
- Use a calculator or a spreadsheet to enter the exact amount that you want to buy. Do not rely on your memory or guesswork. Double-check the amount before you confirm the purchase.
- Use a bank account that has enough funds to cover the purchase. Make sure that the account number and routing number are correct and match the ones on your TreasuryDirect account. You can also set up a direct debit or a payroll deduction to automate your purchases.
- Review your purchase confirmation and receipt carefully. Make sure that the amount, the date, the interest rate, and the bank account are correct. If you notice any errors, contact TreasuryDirect immediately.
Passionate about finance news and updates, I’m your go-to guide through the twists and turns of the financial world. With a knack for breaking down complex topics into bite-sized insights, I’m here to make finance accessible and exciting for you.