April 18, 2022
Over the years I have come to realize I struggle with seasonal depression. It tends to flare up in late-March and early-April, just as I go through the tax-prep fire drill and pay my estimated Federal and State taxes. You could call it tax-seasonal depression. It is just hard for me to get excited about sending money to the government. This year, to combat my tax-seasonal depression, I am focusing on what I think are two really good ideas: I-Bonds and Floating Rate Treasuries.
I last wrote about I-Bonds in April of 2020, shortly after the Fed Funds Rate went back to zero. At that time, I Bonds were earning 2.22%. As a reminder, I Bonds are issued by the U.S. Treasury so there is no credit risk. The interest earned on I Bonds has two components, a small, fixed component, and a variable component that adjusts with inflation in May and November. As I type, I Bonds are currently yielding 7.12% risk free. When the variable rate resets in May, I Bonds will be yielding 9.62% risk free. Earnings are not subject to State or Local taxes, and you may elect to defer paying Federal taxes on your earnings for up to 30 years. If proceeds are used to pay for college education, no Federal tax is due.
I can already feel my tax-seasonal depression lifting.
On hearing these details, one client recently said, “Let’s back up the truck and load up!” Problem is, the Treasury limits purchases to $10,000 per year per individual. If you are due a Federal tax refund, you can purchase up to $5,000 more with your tax refund proceeds. So the maximum amount a married couple could buy in any given year is $25,000. Hardly a truckload.
The next good idea is Treasury Floating Rate Notes or FRNs. Like I Bonds, these securities are issued by the U.S. Treasury, have no credit risk, and have a variable interest rate component. The interest rate is tied to the 13-week T-Bill rate and resets weekly. The 13-week T-Bill rate is currently 0.75% and is expected to rise over time as the Federal Reserve increases the Federal Funds Rate. Interest accrues daily and is paid quarterly. Earnings are not subject to State or Local taxes. The Treasury FRN market is north of $600 billion, so unless you have a really, really big truck, you can purchase as many as you like.
The yield on FRNs is not as attractive as I Bonds, but it’s more attractive than what is currently available in other low- or no-risk vehicles like money market funds or FDIC insured bank accounts. There is some administrative burden, to be sure, but in a rising rate environment, the relative attractiveness is likely to grow over time.
Benefits that grow over time. That’s something I can get excited about!