Return on I Bonds will be a little lower over the next 6 months
The return on inflation-adjusted savings bonds is going to be a little lower over the next six months.
But Series I Savings Bonds will continue to pay a far better return than certificates of deposit, money market accounts or pretty much any other accounts at banks or credit unions.
The Consumer Price Index released by the Bureau of Labor Statistics this morning shows the annualized inflation rate over the past six months was 3.06%.
That's down from the 4.6% those bonds paid the six previous months and which the Treasury has been paying on Series I Bonds since May 1.
The total return on is calculated by adding the inflation rate, which changes every six months, and a fixed rate that is based on when your bond was purchased and does not change for as long as you own the bond.
The fixed rate has been as high as 3.6% for bonds purchased between May 1 and Oct. 31, 2000.
But the fixed rate has been zero since last November, and we don't expect that to change when the Treasury announces what the fixed rate will be for bonds purchased between Nov. 1, 2011, and April 30, 2012.
That means the inflation rate of 3.06% will be the total return for all I Bonds purchased beginning in November.
Since the CPI-U for March 2011 was 223.467 and the CPI-U for September 2011 was 226.889, it represents an increase of 1.53%. Multiply times two for the annual percentage, and you get the annualized rate of 3.06%
But you still have time to earn 4.6% for six months. Your rate changes every six months after the issue date -- that's the date you purchased the bond.
So, if you bought a bond today, you'd get the higher rate until March, and then you'd earn the 3.06% composite rate for six months after that. Your composite rates going forward would change every April 1 and Oct. 1 until you cash out the bond.
Either way, that's still a much better deal than you'll get from even the top-paying CDs.
The best 12-month CD rates are just 1.10% APY to 1.15% APY.
October's top 3-year CD rates are just 1.55% APY to 1.65% APY.
Savings bonds have several tax advantages over CDs, too:
- You don't have to pay tax on the interest you earn until the bonds are redeemed. With CDs, you're taxed on the interest in the year it's earned.
- The interest earned on savings bonds is exempt from state and local income taxes. That's a big plus for residents of states that levy a hefty tax on investment income, such as California and New York.
- The interest can even be exempt from federal income taxes if the bonds are used to pay for eligible college expenses. (See IRS Publication 970, Tax Benefits For Education.)
The easiest way to buy savings bonds is at TreasuryDirect and have them issued electronically to your account.
Or you can purchase the familiar paper savings bonds at most banks through Jan. 1, when paper bonds will be discontinued.
Unfortunately, the government will only allow you to invest $5,000 a year in a single type of bond, under a single Social Security number.
The reduction from the previous $30,000 annual limit was made in 2008, supposedly to refocus the savings bond program on individuals with relatively small sums to invest.
But it's possible to buy $5,000 worth of bonds online, and another $5,000 worth of paper bonds with a single Social Security number.
Or you can buy $5,000 worth of Series I Bonds online, and another $5,000 worth of fixed-rate Series EE bonds (currently paying 1.10%) online.
One final quirk about the savings bond system.
All Series I Bonds and Series EE Bonds purchased electronically are issued at face value. So if you pay $1,000 for a bond, it is immediately worth that much.
Paper Series EE bonds are issued at half their face value. You will pay $500 for a $1,000 bond, but it will not be worth its face value until it matures.
If you redeem Series I Bonds within the first five years, you'll forfeit the three most recent months' worth of interest. After 5 years, there is no early withdrawal penalty.