About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Next I Bond Inflation Component Makes I Bonds Better than CDs


Next I Bond Inflation Component Makes I Bonds Better than CDs

The Labor Department released the September CPI numbers today, and with these numbers, the next Series I Savings Bond inflation component can be computed. The I Bond inflation component taking effect in November should be 3.06%. This is down from the current rate of 4.60%. Inflation has gone down a bit, but it remained fairly high. That's good news for I Bond investors. The I Bond inflation component is added on to the I Bond fixed rate to derive the I Bond composite rate. The fixed rate is currently zero percent, and it's likely to stay this way in November.

The new rate makes an attractive no-risk opportunity. However, with the annual I-Bond purchase limit of $5,000 online and $5,000 paper, the opportunity is limited.

If you buy I Bonds before the end of October, you can know the rate you'll receive for the next 12 months. The interst rate for the first 6 months will be based on the current inflation component (4.60%). The next 6 months will be based on this new rate (3.06%). After that, it'll depend on future inflation numbers. The current fixed rate component of zero percent will stay the same for the life of the bond. I describe the details of calculating the expected return below.

I Bond Rates of Return for October 2011 Purchase

From Treasury Direct I Savings Bonds FAQs:

the inflation rate announced in November is the change between the CPI-U figures from the preceding March and September.

All previous CPI-U numbers are available from this government webpage. The CPI-U for March 2011 was 223.467. Last September 2011 CPI-U was 226.889. This is an increase of 1.53%. The annualized version of this is about 3.06%.

If you buy before November, you'll receive the current I-Bond fixed rate of 0% for the life of the I Bond. The inflation component will be added to this rate and will change every 6 months. The current inflation component is 4.60%, and the composite rate is 4.60%. Here's an estimate of the return for the next year:

  • 4.60% from October 2011 through March 2012
  • 3.06% from April 2012 through September 2012

I Bonds increase in value on the first day of the month. So on November 1st, you'll earn the interest for the full month of October. So for maximum return, it's best to buy I Bonds near the end of the month and redeem them early in the month.

If you redeem an I Bond before 5 years, you lose the last 3 months of interest. So based on this and the above numbers, if you buy an I Bond on October 28, 2011, the value of the I Bond on October 1, 2012 would be about 3.07% higher. For 11 months, this comes out to an annualized yield of about 3.34%.

Below is an estimated annualized return for I Bond redemptions from October 1, 2012 to January 1, 2013. It is assumed you will buy the I Bond on October 28, 2011 which gives you almost an extra month of interest. This effectively reduces the 3-month penalty to 2 months.

  • 3.34% - redeem on 10/1/12, 6mo of 4.60%, 3mo of 3.06%, and 3mo of 0% (penalty)
  • 3.32% - redeem on 11/1/12, 6mo of 4.60%, 4mo of 3.06%, and 3mo of 0% (penalty)
  • 3.30% - redeem on 12/1/12, 6mo of 4.60%, 5mo of 3.06%, and 3mo of 0% (penalty)
  • 3.28% - redeem on 01/1/13, 6mo of 4.60%, 6mo of 3.06%, and 3mo of 0% (penalty)

The highest guaranteed rate would be an annualized return of 3.34% for about 11 months (from 10/28/11 to 10/01/12). Note, it's best not to wait until the last day of the month to buy I Bonds at Treasury Direct. In May I described my experiment in seeing how late in the month I could buy an I Bond. I found you should make sure the purchase is no later than the second to last business day of the month.

Compared to CD Rates

As you can see, the above rates are much higher than any CD rate that you can get today. The best nationally available 1-year CD rate is 1.30% APY ($25K minimum) at Alliant Credit Union. The best nationally available 5-year CD rate is 2.75% APY ($100K minimum) at Firstmark Credit Union. These rates are accurate as of 10/19/2011, and they do not require a checking account.

Unfortunately, an exact comparison between I Bonds and long-term CDs is not possible. The reason is that the I Bond inflation rate changes every six months. For this short period of time from now to before November, we know the I Bond inflation rate for 12 months. We can only guess about the I Bond inflation rate after that. The best we can do is to make an estimate of the future inflation rates.

As an estimate, I've calculated the average I Bond inflation rate since the I Bond program began in September 1998. That average is 2.65%. Note, this takes into account the period in 2009 when the I Bond inflation rate was negative. Since the composite rate can never be negative, I used zero for this period in calculating the average.

If the future I Bond inflation rates match the past average, I Bonds should do well as compared to today's long-term CDs.

If you have older I Bonds, you probably have I Bond fixed rates higher than zero percent, and if you're fortunate enough to have purchased I Bonds before 2001, you probably have fixed rates over 3.00%. So those I Bonds are especially good deals in today's environment.

Remember the $10K Annual Purchase Limit

Before you get too excited, remember that the annual purchase limit is $5K for online and $5K for paper. So if you earn 3.32% APY for 12 months on $10K, the total dollar amount of interest is about $332. As a comparison, a $10K deposit into Ally Bank's 5-year CD (at 2.00% APY) would return about $200. So you won't make that much more with the I Bond. Nevertheless, I Bonds have some nice features that CDs don't have such as being exempt from state and local income tax.

Series I Savings Bond Features

Below is a summary of the I Bond features. More information is available at this Treasury I Bond page:

  • Can't be redeemed within 12 months of issue date
  • Lose 3 months interest if redeemed within 5 years
  • Interest is composed of fixed and inflation-based rate
  • Fixed rate remains for life of bond
  • Inflation-based rate changes every 6 months after issue date
  • New rates announced every six months on November and May 1st
  • Federal tax can be deferred on interest until bond is redeemed
  • Interest is exempt from state and local tax
  • Some or all interest is tax exempt when used for educational expenses

The current I Bond purchase limit is $10,000 per year ($5K online and $5K paper). However, starting in 2012, you will no longer be able to purchase paper I Bonds from banks and credit unions (see my post on this change).

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mak1118   |     |   Comment #2
It is already tax deferred so it wouldn't make sense to hold it in an IRA but you could.
Shorebreak   |     |   Comment #3
Here is a comparison between I Bonds and TIPS...

Anonymous   |     |   Comment #4
If you buy a series I bond for your kids how do you redeem and is there tax issues doign this?  If i bought $10k worth for my 3 kids, and redeemed them afte 12 months assuming they have no other income, will there be tax issues for me or them?
Anon567   |     |   Comment #5
mak118 - not sure how you could ever get either the paper bond, or the treasury direct account to end up inside an IRA.  I don't think there is any way to do that!  You could use the IRA dollars, but it would end up as a taxable distribution.

At least, I think that is right.  Best to check with your CPA, but I doubt it is able to be done inside an IRA.
Paoli   |     |   Comment #6
Is there any way to "guesstimate" what the I Bond interest rates will change to during the 5 years?  How low could they go?  Can one get monthly checks from an I Bond?  Thanks!
mak1118   |     |   Comment #8
If you want inflation protection in your IRA you should look into TIPS not I bonds.
Anonymous   |     |   Comment #9
I purchased an I bond at the end of May 11 when the 6 month rate was 4.60. Even with the next 6 month rate at 3.06 it may still be worth keeping it longer than 1 year (rather than cashing in at the end of 1 year and taking a penalty as has been suggested in a previous article). It doesn't look like there will be much else out there when one is considering mainly CDs as safe investments....at least for the next couple of years. The APY will raise or fall depending on the rate announced in May 2012 but may still be worth hanging on to depending on how inflation treats us.
Anonymous   |     |   Comment #10
"The interst rate for the first 6 months will be based on the current inflation component (4.60%). "

This isn't right is it?  I though the new rate was 3.06?
Anonymous   |     |   Comment #11
I think this article is all ****ed up.  The 4.6% rate is about to end, isn't it?  Why would I continue getting 4.6 for the next six months?  The 4.6 is for people who bought in May or June of this year, isn't it?

Totally confused.
Paoli   |     |   Comment #12
I found some good info on I Bonds on the internet and they would not be for me.  First, you are limited to only a small amount you can purchase as was already posted here.  Mainly, my problem would be that you cannot get the interest in monthly or any kind of checks if you need the interest to live on.  It accumulates and you get it all back when they mature.  The article also mentioned you can never get less than 0.00% interest.  What is that all about?? Why would I want anything that has the possibility of paying me 0.00% interest??   I guess the I Bond would be an interesting alternative to CDs for someone with just a small amount of money but I can't see how it would work out for our posters in this group who work with what seems like very large amounts.  However, I appreciate knowing what all is out there in these dismal times for interest rates.
lou   |     |   Comment #13
This is a good deal, but a cap of $10,000 takes away the incentive to hassle with it.
melman   |     |   Comment #14
Replying to #11 -

Bonds bought between May 1, 2011 and Oct. 31, 2011 will earn 4.6% for the first 6 months. Then their rates will adjust to 3.06% for the next 6 months.

If you're confused, maybe you should avoid statements like "this article is all ****ed up".  The article is totally correct.

Brett CPA
Brett CPA   |     |   Comment #15
The $10,000 limit reallly makes this of limited value to most investors.  Hard to believe many people would waste their time and energy bothering for such little $ advantage.
Anonymous   |     |   Comment #16
I'm a very little fish in the financial world.  Poster #15 states it's not worth his time for $10,000.  Well, $10,000 is more than I report on line 7 of my 1040.  Here's how I make some extra money.  I look for credit cards that offer you between $100.00 and up to open them.  I apply for them, meet their requirements, and close them.  This year I will bring in a little over $1,000.00 with these bonuses and cash back.  It's somewhat embarrassing, but what can one do in this economy?  If anyone know of some good cash back promo credit cards, please leave a post.
Anonymous   |     |   Comment #39
#16: Yes, I have been doing that as well with all of the credit card offers I have received.
Anonymous   |     |   Comment #17
Bill   |     |   Comment #18
Carla   |     |   Comment #19
To Anonymous #16:  I think what the poster meant was, it's not worth his time to get a SLIGHTLY BETTER RATE on $10,000.  For that, I would agree.  We're talking very little money here, and of course any slight addl. interest will be subject to at least some income tax.  Not worth the effort, IMHO.
Anonymous   |     |   Comment #20
Too bad they lowered the limit to $5,000 paper and $5,000 electronic per year (and starting next year, only $5,000 electronic because banks do not want to process the paperwork anymore for paper bonds).  You can thank the bankers for forcing the Treasury Department to make this change.  The bankers want people to put their money with the banks, not with the Treasury Department.

However, since interest rates are so low, purchasing the I-bond today would be a better deal than putting money in an IRA CD.  Who cares if a Roth IRA is tax free for withdrawals.  The rate of return for IRA CDs is next to nothing.  So you would pay zero tax for zero return.
Anonymous   |     |   Comment #21
The $5,000 limit for IRAs is also a small amount.  So why bother?
mak1118   |     |   Comment #22
People should have been buying I Bonds when they gave you a base rate, I bought mine in 2000 through 2003 and received 3% and 1.6% base rate and you could buy 60,000.00 a year back then,at this time with 0 base rate and a 10,000.00 limit I wouldn't waste my time.
Rosedala   |     |   Comment #23
<<If you redeem an I Bond before 5 years, you lose the last 3 months of interest.>>

Thanks so much Ken for a new (to me) perspective with your usual thorough and clear research!  I never had tried it so I'll study it a little more, but are these I Bonds fixed for a 5-year period, sort of like a CD?   Thanks again.  :) Rosedala
mak1118   |     |   Comment #24
#23   The only thing fixed on these I bonds are the 0% base rate the inflation component is figured every 6 months.
confused   |     |   Comment #25
why are so many people posting on such old topics / the revelancy is ?
Anonymous   |     |   Comment #26
I BONDS ARE TAX DEFERRED. Holding an I bond in a IRA is not helpful since IRAs are tax deferred anyway.  The I bonds are taxed upon redemption so unlike an IRA you do not have to wait until you are 59 1/2 or tax a minimum distribution at 70 1/2.  I bonds are limited and are best used for those who have already maxed their IRAs. 
Anonymous   |     |   Comment #27
Anonymous   |     |   Comment #28
An I-bond is essentially a six month "long term" CD that keeps renewing.  It was meant for those who are buying small amounts (perhaps as gifts to others).  They are scaling it back to push the big money into Treasury Direct and the other US Government securities.
Anonymous   |     |   Comment #29
Where are you getting this information? The current IU bond rate end when the new rate comes out in November. 

Please provide an official site that says it continues for 6 months for people buying their bonds in October. 

I have never heard anything like this before.
melman   |     |   Comment #30
Look, I've been buying I-bonds since 2001.  That's how it works.
Anonymous   |     |   Comment #31
If I can't make the online purchase before the end of this month, (I have to wait the stupid access code card) what will be the interest rate then?

melman   |     |   Comment #32
Bonds bought during October will earn a rate of 0% fixed-rate plus 4.60% variable/inflation-rate.  (Starting from Oct. 1.)  They will earn at this rate until April 1, when they will start to earn 0% fixed plus 3.06% variable, for the next 6 months.

Bonds bought during November will earn a rate of ??% fixed-rate plus 3.06% variable/inflation-rate.  They will earn at this rate until May 1.  The new "??" fixed rate component will be announced at the beginning of November.  On May 1, 2012, these bonds will begin to earn "??" fixed plus the next variable/inflation rate number which we'll know after the CPI announcement in mid April.


What some people are not understanding, is that although the variable rate component changes every Nov. 1 and May 1, that ALL bonds do not also change their rates on Nov. 1 and May 1.  The variable part of the rate that a particular bond earns, changes when the bond is 6 months old, 12 months old, 18 months old, etc.  Using the variable rate in effect at that time.
Anonymous   |     |   Comment #34
Buddtaoist   |     |   Comment #36
Where is the official link to buy it online? How about paper? Would any bank and CU sale it? Please give a hint if you know. Appreciated!
mak1118   |     |   Comment #37
#36:  Go to www.treasurydirect.com you will find all your answers there.
emory   |     |   Comment #38

look for purchase form PD F 5374, and then link to online form for the I bond purchase.  Complete the form, print, sign, and mail with check.
Anonymous   |     |   Comment #40
I have a question, can I create an account with TreasuryDirect and buy the I-bond at the same time without waiting for the access card?  As someone stated already, it will take 2 weeks to receive the access card.  Thank you.
Anonymous   |     |   Comment #41
Ok, doesn't seem like I can create and buy I-bond at the same time, have to wait for the access card.

#38, I found the form PD F 5374, https://www.savingsbondsdirect.gov/otc/bondOrder.html

Can you elaborate what you meant by link to online form? 

>look for purchase form PD F 5374, and then link to online form for the I bond purchase.  Complete the >form, print, sign, and mail with check.

What about the check part, will it take personal check?  Any other alternatives?  Checks probably take long time to clear.

Thank you.
emory   |     |   Comment #42
#41 Find the PD F 5374 here

http://www.treasurydirect.gov/NC/FoRMSHome?FormType=SBF&site=indiv#Purchase Forms

At the bottom of the PD F 5374, it will state "use online order form"  Click on that, complete the form, and mail as directed to the FRB of Minneapolis.  

Alternatively, you could take the form and check to your financial institution instead of mailing the completed form and check to the FRB of Minneapolis. 
Anonymous   |     |   Comment #43
Thank you, #42.  One more thing about this issue date, how long does it take the Federal Reserve bank to clear a personal check?  Anyone knows??

>The issue date of your savings bond(s) will be the first day of the month in which the Federal Reserve Bank receives your payment of the purchase price.
Anonymous   |     |   Comment #44
So to take advantage of purchasing both $5000 online and $5000 paper by October 28, 2011 one must already have an access code?
Anonymous   |     |   Comment #45
#44, access code is needed for online only.
Buddtaoist   |     |   Comment #46
I am #38. Thanks for all who gave me the link. I bought 5K online with form PDF 5374 filled and printed through TreasuryDirect, and mailed with a check. Thank you, #41. Also went to a local bank after confirmed they do sell I-bond. Bought TWO 5K in paper, because the bond can have a co-owner, so your spouse can buy 10K with you as co-owner.  Here is something confirmed by the banker: the issue date is the day you filled in the form. 

emory   |     |   Comment #47
#46.  You were not #38, you were #36.

I am not understanding your mailed purchases, and your bank purchases.  I always thought the Treasury Direct form PD F 5374 was for either mailed purchases (to FRB Minneapolis) or for your local bank purchases, but not both. ("Application for Series I Bonds that is sent or taken to a bank or Federal Reserve Bank to purchase a savings bond.")

Maybe I am incorrect.  

Could someone smarter than me let us know the correct information?

Anonymous   |     |   Comment #51
#46, according to the instruction, that form is used to buy paper one; for electronic one, you need your access card. https://www.savingsbondsdirect.gov/otc/INSTRUCTIONS4.pdf
niniss   |     |   Comment #52
#51, in that case he bought $10k of paper bonds.  What will happen then?

Update on my experience - I went online and canceled the $100 transaction.   Also, went to a bank bought $5k paper bonds.  When i asked about the purchase limitation, the teller told me she's not aware of any.  I was tempted to buy more but decided not to push my luck.  lol  
niniss   |     |   Comment #48
Ken or anyone else who can explain this:  I just bought $5k online 20 minutes ago.  It showes purchase date as oct 28, and issue date of oct 31, so i guess i'm safe.  The strange thing is, out of curiousity (i just wanted to test the purchase limitation rule), i made another online transaction for $100 and guess what, it went through!  So now i have 2 pending transactions for a total of $5100.  What would happen for the second transaction?  will they just cancel it on me later or something else?     
Anonymous   |     |   Comment #49
niniss   |     |   Comment #50
#49 - thanks for answering my question.  So the TD system is not that smart/advanced, it could have told me that when i tried to put the order in. 
niniss   |     |   Comment #55
To #53, they let you use internet and post in this forum??  Wow, not bad a life in prison!
to 53
to 53   |     |   Comment #56
can you say shaw shank
robj   |     |   Comment #57
instead of waiting for the treasury direct to send you access cards, go into your bank before 12/31/11 and max out your paper I bond capabilities by buying $5000.  Get Quicken software and create a Trust before 12/31/11 and you can buy another $5000 in paper I bonds before 12/31/11 in the Trusts name.  While you are doing that treasury direct will be confirming your bonafides and send you access and you can buy another $5000 electronic in your name.  Send them in the Declaration of Trust document and buy another $5000 electronically for your trust.

That's $20K in 2011 and buy another $10K ($5000 electronically in personal and trust) and you've got $30,000 earning 3.06% right there.