Dedicated to Deposits: Deals, Data, and Discussion

I Bond Fixed Rate Plummets from 1.20% to 0%

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The TreasuryDirect just announced the new I Bond rates today. The new inflation component is 4.84% which is about what had been predicted. The fixed rate had the largest drop it has ever had since the I Bonds started. It fell from 1.20% to 0%. The largest previous drop was in November 2001 when it fell from 3% to 2%.

The inflation component is combined with the fixed rate to give the total earnings rate. Due to high inflation we've been experiencing, the inflation component is a very high 4.84% so the the combined rate is a respectable 4.84%. However, with a 0% fixed rate, the earnings now will just keep pace with the government reported inflation (CPI-U). The table below shows the history of these rates, and you can see that the inflation component can often be very low.

With this new low fixed rate and the recent purchase limit reductions, I'm afraid these I Bonds have lost much of their appeal.

For more I Bond details, please refer to my previous I Bond post and the Treasury Direct page.

I Bond Rate History as of May 2009:

Date Fixed Infl
Rate Cmp
May 2009 0.10% -5.56%
Nov 2008 0.70% 4.92%
May 2008 0.00% 4.84%
Nov 2007 1.20% 3.06%
May 2007 1.30% 2.42%
Nov 2006 1.40% 3.10%
May 2006 1.40% 1.00%
Nov 2005 1.00% 5.70%
May 2005 1.20% 3.58%
Nov 2004 1.00% 2.66%
May 2004 1.00% 2.38%
Nov 2003 1.10% 1.08%
May 2003 1.10% 3.54%
Nov 2002 1.60% 2.46%
May 2002 2.00% 0.56%
Nov 2001 2.00% 2.38%
May 2001 3.00% 2.88%
Nov 2000 3.40% 3.04%
May 2000 3.60% 3.82%
Nov 1999 3.40% 3.52%
May 1999 3.30% 1.72%
Nov 1998 3.30% 1.72%
Sep 1998 3.40% 1.24%


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Comments
24 Comments.
Comment #1 by Anonymous posted on
Anonymous
Purchased 5000 Ibond on April 30th.

So I get the 1.20 fixed rate component for the life of the bond.

Worked out nicely.

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Comment #2 by Alex Moskalyuk (anonymous) posted on
Alex Moskalyuk
Correct me if I am wrong, but this is 4.84% of tax-free gains even at 0% stable rate. Depending on your income bracket, even at 25% federal income tax rate you'd have to have invested into a 6.01% APY CD to match this, leave alone state income tax, if you pay any.

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Comment #3 by Anonymous posted on
Anonymous
It's sad when we're happy about getting a 1.20% fixed rate instead of 0.

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Comment #4 by Anonymous posted on
Anonymous
US Savings Bonds are taxed in full for the entire acrued interest when you cash them for Federal Tax purposes, but free of State Tax.

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Comment #5 by Anonymous posted on
Anonymous
No state or local income taxes on savings bonds.

You do pay federal income taxes on the bonds.

You have two choices:

1) Pay as you go. Pay income taxes on the interest earned that year.

2) Pay taxes on the total interest received over the bond's lifetime in the year you cash in the bonds.

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Comment #6 by Doug (anonymous) posted on
Doug
Banking Guy, is it my BlackBerry browser, or is your table missing the Inflation Rate column?

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Comment #7 by Anonymous posted on
Anonymous
does this mean that since the interest rate is 0, no fed tax would be due on these ever? is the tax due only on the fixed interest portion of these bonds or the combination of the rates?

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Comment #8 by Michael (anonymous) posted on
Michael
Off topic:

There is a bank in Canada offering a free Asus Eee PC mini notebook if one opens up an account. Go to:

http://tinyurl.com/5qptvs

...to read about it.

U.S. Banks take notice.

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Comment #9 by Anonymous posted on
Anonymous
Bankguy, We need a Forum.

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Comment #10 by Anonymous posted on
Anonymous
Let me do the math.
Per http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

If you got ur iBond b4 May 1st.
Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

Fixed rate is 1.2%, inflation rate is 1.53% and 2.42% for the first and second 6 months.
For the first six month, u'll get a 4.28% rate. Second six month, u will get a 6.07% rate. The average rate of the two rates is (4.28+6.07)/2=5.17% and pay no state / local tax.

Do you guys think I got the math right?

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Comment #11 by Anonymous posted on
Anonymous
Interest earnings may be excluded from Federal income tax when used to finance education (see education tax exclusions).

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Comment #12 by Sofa King Frustrated (anonymous) posted on
Sofa King Frustrated
I disagree. We don't need a forum.

I like Bank Guy's site just the way it is.

People are free to post any comment they want. Why change it?

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Comment #13 by Anonymous posted on
Anonymous
5.17% is about right if you dont withdraw the bond.

If you keep the bond for 14 mths, after the interest penalty of 3 months, it comes to 4.40%.

If you keep for 5 years no penalty.

Ibond is a great investment for 5,000.

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Comment #14 by Anonymous posted on
Anonymous
Dont get me wrong I love this site. If we also had a forum this topic could stay alive ,thats all

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Comment #15 by Anonymous posted on
Anonymous
Let me see if I understand this. In november 2007 the I bond was paying 4.26% and this was considered good.
Now in May 2008 its Paying 4.84% and this is bad ?

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Comment #16 by Anonymous posted on
Anonymous
Anyone who buys I-Bonds during this period will get only the variable inflation rate over the term of the bonds. And, of course, the inflation rate is not accurate anyhow because of how they calculate it.

I-Bonds are not a good deal. You are committed but the government isn't.

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Comment #17 by Anonymous posted on
Anonymous
I-Bonds lure people in with a high inflation rate, which inevitably falls to something unacceptably low, so you want to cash out.

Take the example of the original commenter who locked in a fixed rate of 1.2%. If he cashes out a year from now, he'll only net 3.60% APY. If he's smarter and waits 15 months, then he'll end up with 4.14% APY.

Compare these rates to current one-year CDs.

I-Bonds appear as good investments only when inflation is unusually high.

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Comment #18 by Anonymous posted on
Anonymous
Quote: "I-Bonds appear as good investments only when inflation is unusually high."

I-Bonds would be very good investments right now if the Fed didn't use bogus figures in the way they calculate the inflation rate!

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Comment #19 by Anonymous posted on
Anonymous
I am the initial poster.

I locked in an i-bond at 1.20% fixed rate. Which means a 4.40% return for 14 mths which is higher than any CD product now on the market, and this is the rate AFTER 3 month interest penalty.

If inflation keeps up as being high I will keep the bond and earn even more on the money than the 4.40%. If inflation dips sharply and the rate is no longer good, I can cash out.

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Comment #20 by Anonymous posted on
Anonymous
Just want to add that if you opened an account online before May 1 2008, even if you had to wait for your access card in the mail to put money in, you are locked into the 1.2% + 4.84% rate (according to CSR at 800-245-2804 today). I thought I missed the April 30 cutoff because of this unexpected extra step. It looks that I can still get in on top of the 5K bought at a local bank.

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Comment #21 by Anonymous posted on
Anonymous
The info I got from CSR on 5/5 about account opened before May 1 turned out to be incorrect - good thing that I double-checked. See email I submited within my online account and reply below -

Q: I meant to open this account and purchase 5K I bond on 4/28/2008. But to my surprise, I had to wait for the access card before I could buy. May 1 has come and gone. I got my access card and called 800-245-2804 on 5/5. I was told by the service rep that since I opened my account on 4/28, I can still purchase I Bond with the terms as of 4/28 in May. Is this true? Please advise. Thanks.

A:
Hello

No, this is not true. You could not make a purchase until you received your Access Card. An electronic Series I savings bond will be issue dated for the date we receive the funds from the purchaser. To be more specific, the ACH debit file is built at 12:00 a.m. ET and issues will appear in an owner's TreasuryDirect account (in Current Holdings or Gift Box) later that morning at 11:30 a.m. This means that if an account owner purchases a bond before midnight, it will appear in his or her account by 11:30 the following morning.

Therfore, in order to get an April issue date, your purchase must have been completed before 11:59 a.m. on April 29, 2008.

I trust this information will be of assistance.

Sondra Veon
Customer Service Specialist
Sent by: Sondra.Veon@bpd.treas.gov

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Comment #22 by Keelaay (anonymous) posted on
Keelaay
Good forum. But lots of mis-information. For starters, their is nothing "bogus" about the iBond inflation component. It is simply the six-month change in the CPI. That's what inflation is for you and I. Multiply it by 2 (to annualize) add the fixed times the inflation components(not sure why but I'll take it) and add all to the fixed rate. Of course the higher the fixed rate, the better the iBond, but remember the iBond is only intended to keep pace with inflation -- no more, no less. So if the CPI does not go up (no inflation) the iBond inflation component will be zero. So there will be times when iBonds beat other money rates, and times when they will not depending on, you guessed it, inflation. If you are purely interested in keeping pace with inflation, iBonds are a risk free way to do it. If you want to beat inflation, either wait for a better fixed base rate, or take a more risk in an alternative investment. Last myth buster... iBonds are not tax free. They are tax deferred. Unless you use the proceeds for higher education, iBond earnings are treated as federal taxable income upon withdrawal. Bottom line, my 2003 iBonds are paying about 6% per year today, tax deferred. That's a bit better than inflation and way better than any savings bonds or CDs I can buy.

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Comment #23 by whiteblack (anonymous) posted on
whiteblack
Depending on your income bracket, even at 25% federal income tax rate you'd have to have invested into a 6.01% APY CD to match this, leave alone state income tax, if you pay any.

 

You do pay federal income taxes on the bonds.

____________________________________________

Whiteblack

<a href="fixedrateisa.org" rel="dofollow">Fixed Rate ISA</a>

1
Comment #24 by Anonymous posted on
Anonymous
My thoughts are that since the inflation portion (CPI-U) may drop to zero due to spike prior to the last reset, there would be a likely increase in the fixed offering to attract buyers. Would anyone rush out to buy I-bonds at 1%?

I'm perplexed about this recommendation to buy now before the reset given that outlook. His recommendation to buy before the last reset though was spot on. This gave a higher base rate of 1.1% and a full year of higher rates.

<a href="http://www.absolutewealth.com/category/featured/">Alternative Investment</a>

 

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