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Redeeming I Bonds for Maximum Interest


After my yesterday's post on the very low I Bond rates announced yesterday, several readers have brought up an important point regarding I Bond redemptions. If you redeem an I Bond within the first 5 years, you'll lose your LAST 3 months interest (note that you can't redeem before the first year). If you decide to redeem your I Bonds, you'll want to make sure you lose the 3 months interest when the inflation rate is 1% and not 5.70%. Here's a chart based on information from the Treasury, the Savings Bond Advisor, and this FW thread:

Purchases after May 2001 and before November 2005

Purchased 6 months 3 months of When to
on of +5.70% +1% forfeited Redeem
--------- ------------ ------------- -------
May/Nov Nov thru Apr May thru Jul Aug 06
Jun/Dec Dec thru May Jun thru Aug Sep 06
Jul/Jan Jan thru Jun Jul thru Sep Oct 06
Aug/Feb Feb thru Jul Aug thru Oct Nov 06
Sep/Mar Mar thru Aug Sep thru Nov Dec 06
Oct/Apr Apr thru Sep Oct thru Dec Jan 07

Remember to redeem the I Bonds as early in the month as possible. Also note, for purchases on or before May 2001, you can redeem starting this month without worrying about the interest penalty. For those cases, the best time to redeem would be the first of the three months that's listed in the +1% forfeited column. That's when you have earned the full 6 months of 5.70% (plus your fixed rate).
procol   |     |   Comment #1
Be careful not to redeem any IBonds paying a 3%+ base rate. You do not want to give those up.

You may not want to redeem 2% base rate Ibonds , buts thats a closer call.

Kick the 1% Base Ibonds back to your uncle, and reinvest at 5%.
Anonymous   |     |   Comment #2
I use the Savings Bond Wizard thick client, it's telling me my 3/2002 ibond's rate is 7.76% and yield is 4.06%.

The 6/2003 iBonds having rate of 6.83% and yield of 3.61%. When is a good time to sell this lot to have the lowest 3 months penalty?
Banking Guy
Banking Guy   |     |   Comment #3
procol, that's a good point about the old 3%+ base rates. That was a good deal, and it would be wise to hang on to those. Check out this post for a history of the fixed rates. Any I Bonds purchased before November 2001, earn 3%+ in the fixed rate. With the average inflation rate being 2.55%, this makes for a decent average return that's taxed deferred.

About the 6/2003 I Bonds, September 1, 2006 would be a good time to sell. The 3 months of loss interest would include the new 1% inflation rate.
Anonymous   |     |   Comment #4
I don't think this is correct. The way it works is that you do not get any interest credited to your account for the first 3 months you hold the I-Bond. So this strategy does not work.
Banking Guy
Banking Guy   |     |   Comment #5
I did find on the Treasury's FAQ the following:

"if you redeem an I Bond within the first 5 years, you'll lose your last 3 months interest."

The first 3 months of interest may not be included by the Treasury Direct when it's tracking the bonds during the first 3 months of an I Bond term.
Anonymous   |     |   Comment #6
If I were to sell my iBond, the redeemed value should be the same across all banks or should I watch out for the correct sell value?
Banking Guy
Banking Guy   |     |   Comment #7
Yes, it should be the same no matter where you redeem it. Just be sure you redeem at the start of the month. You can refer to the Treasury site and use either their online or offline wizard to determine the value.