Let me start by saying that this is more of an article about investing than real estate, but I hope you find it useful nonetheless.
If someone offers you a risk-free investment, beware because by nature, financial investment is risky. The foundation of investing is the risk-return trade-off, where the higher the risk, the greater the potential reward. The idea that risk is a central part of the equation is inherent in this saying.
That said, can I introduce you to a (nearly) risk-free investment: the Series I US Treasury bond that pays 9.62% tax-deferred interest and is available from now until October 31, 2022 If you buy before the deadline, this return of 9.62% is guaranteed for six months. Series “I” bonds mean that they are linked to inflation. If inflation is high, the interest rate is high. If inflation is low, the rate is low. So, after six months, the Treasury Department adds the interest you’ve earned to your principal and pays interest on your new principal balance at the new rate it determines on November 1.
Other low-risk or no-risk options such as savings accounts, short-term certificates of deposit (CDs), or treasury bills cannot come close to this return.
Additional benefits include the fact that this income is not taxable by the state, which increases your after-tax return. Additionally, if the funds are used for higher education, the income is completely tax-free. Did I hear you say you have grandkids interested in going to college someday? You can buy a bond in their name and when they redeem it for school, the proceeds will be tax-free. Even if they don’t use it to go to school, chances are their tax bracket will be lower than yours, so tax liability will be limited. Heck, they could cash it in and use the proceeds for a down payment on a house – one of my favorite investments.
Are there any drawbacks or limitations, you wonder? The biggest downside is that this opportunity is limited to an annual investment of $10,000. However, we have a little wiggle room here. If you own a corporation, including a limited liability company (LLC), you can purchase another Series I bond (one per company). If you have a living trust, he can also buy one. If you received a federal tax refund, you are allowed to contribute up to $5,000 of that refund to a Series I bond in addition to the $10,000 limit. (Note: the $5,000 refund is per return, not per person.)
You, your spouse, living trust, LLCs, and corporations can purchase up to $10,000 each online (you can do this every calendar year, but rates won’t always be 9.62) . You can also purchase as many gift bonds as you like, but only if the recipients have not already purchased their own Series I bond. The $10,000 annual limit on bond purchases applies to beneficiaries, not you.
Please note: this is a five-year deposit that you are obliged to keep for one year. If you choose to liquidate after one year, you lose three months of accrued interest. If you earned $962 on your $10,000 investment over a one-year period, you would need to repay $240.50, leaving you with a return of $721.50. Even under these circumstances, it’s not too bad.
To purchase these bonds, go to TreasuryDirect.gov to set up the appropriate accounts. If you want to invest your tax refund, you must purchase paper bonds using Form 1040.
If you have any questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. To view previous articles, visit www.selzerrealty.com and click on “How’s the Market Going”.
Dick Selzer is a real estate broker who has been in the business for over 45 years.