Return on I Bonds jumps to 1.38%
Inflation-adjusted savings bonds will pay slightly better over the next six months than they have over the previous six.
The U.S. Treasury set the annualized total return on Series I Savings Bonds at 1.38% for the next six months.
That's better than you'll earn from the top short- and mid-term certificates of deposit or savings accounts.
And it halts the steady decline in return on these popular government bonds. The new rate is more than investors earned since May, when the rate was set at 1.18%, but still down from the 1.74% it paid between Nov. 1, 2012, and April 30, 2013.
In fact, the rate had been on a steep downward trend since May 2011 when I Bonds paid 4.6%.
Series I Savings Bond Rates, 2010-2013
The total return is set based on the inflation rate for the prior six months and a fixed rate established by Treasury. The fixed rate is set for the life of the bond when you purchase it.
That rate has been zero since November 2010. But Treasury made the surprising move and increased the fixed rate for all I Bonds sold between Nov. 1, 2013, and April 30, 2014 to 0.20%.
The inflation rate is calculated by the changes in the Consumer Price Index and shows the annualized inflation rate over the past six months.
Here's how Treasury figures the inflation component:
The CPI-U for September 2013 was 234.149, and the CPI-U for March 2013 was 232.773. That represents an increase of 0.59% which you multiply by two to get the annualized rate of 1.08%.
The yield on I Bonds may be lower than it was around this time last year, but it's still a little bit better deal than you'll get from even the top-paying CDs.
The top nationally available 24-month CD rate pays 1.20% APY.
But at least you could potentially earn more with an I Bond when rates reset again in six months.
Savings bonds also have several tax advantages over CDs:
- 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.
- 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.)
You can buy savings bonds at TreasuryDirect (www.treasurydirect.com) and have them issued electronically to your account.
Don't bother looking for paper bonds as the Treasury Department stopped issuing them at the beginning of 2012. The only exception is that you can buy up to $5,000 in paper bonds using your tax refund by filing IRS Form 8888.
At the Treasury website, you can buy up to $10,000 in Series I Bonds and another $10,000 in Series EE Bonds.
Paper Series EE bonds are issued at half of their face value. So you'll pay $500 for a $1,000 bond but it will not be worth the face value until it matures.
Do be aware that to avoid any early-withdrawal penalty, you'll have to hold onto the bonds for five years. Redeem them earlier, and you'll forfeit the three most recent months' worth of interest.