Return on I Bonds set to jump this spring
Here's a little glimmer of hope for savers: the return on inflation-adjusted savings bonds is going to increase significantly over the next six months.
Based on the latest Consumer Price Index released today, the U.S. Treasury will set the total return on Series I Savings Bonds to at least 1.82% for all bonds sold between May 1 and Oct. 31.
That yield is better than you can earn on most CDs or money market accounts.
We say the return will be set to at least 1.82% because the inflation rate isn't all that goes into the total return you'll see from I Bonds. The Treasury Department also applies a fixed rate, which it surprisingly boosted from 0% to 0.20% last fall, the first increase in three years.
Series I Savings Bond Rates, 2010-2014
Treasury will announce the fixed rate on May 1 for newly issued bonds. If it keeps the fixed rate unchanged, I Bonds will pay more than 2%.
The beauty of I Bonds is that the federal government tries to at least guarantee your money will keep up with inflation.
But the total return on these safe investments had been in a steady decline until last fall, when the rate on newly issued bonds climbed from 1.18% to 1.38%.
That means bonds issued after April 30 should pay nearly half a percentage point better — or more.
The total return on an I Bond is calculated by adding the fixed rate to the inflation rate, which changes every six months. The fixed rate is determined at the time you purchase your bond and does not change for as long as you own the bond.
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 2014 was 236.293. That represents a six-month increase of .91%. To get the annualized rate, you multiply by two.
Beginning next month, I Bonds will pay more than all but the best nationally available 5-year CD rates. The top deal now pays 2.25% APY.
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.