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April Series I Savings Bonds - Good Deal Compared to CDs

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April Series I Savings Bonds - Good Deal Compared to CDs

The Labor Department released the March CPI-U numbers on Friday, and with these numbers, the next I Bond inflation component can be computed. Inflation as reported by the government took a dip in March, but over the last year, inflation was moderate. Thus, an I Bond purchased before the end of April will compare favorably with CDs.

Based on September and March CPI-U numbers, the inflation component for the May I Bond should be 1.96% (annualized). This number is added on to the I Bond fixed rate to derive the I Bond composite rate. The current I Bond inflation component is 2.76%.

I Bond Rates of Return for April 2017 Purchase

If you buy I Bonds before May, your I Bond will have a fixed rate of 0% and an inflation component of 2.76%. Thus, the composite rate is the same as the inflation rate of 2.76%. This rate will remain in effect for six months until October 1, 2017. The I Bond inflation component that the Treasury announces in May will take effect for your I Bond (purchased this month) in October. That will remain in effect for six months. Since we know the May I Bond inflation component, we can compute the I Bond return for the next year for I Bonds purchased in April.

From Treasury Direct I Savings Bonds FAQs:

The semiannual inflation rate announced in May is the change between the CPI-U figures from the preceding September and March

All previous CPI-U numbers are available from this government webpage. The CPI-U for September 2016 was 241.428. The March 2017 CPI-U was 243.801. This is an increase of 0.98%. The annualized version of this is 1.96%.

If you buy before May, 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 2.76%, and the composite rate is 2.76%. Here's an estimate of the return for the next year:

  • 2.76% from April 2017 through September 2017
  • 1.96% from October 2017 through March 2018

I Bonds increase in value on the first day of the month. So on May 1st, you'll earn the interest for the full month of May. 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 April 30, 2017 (best not to wait to the last day), the redemption value of the I Bond on April 1, 2018 would be about 1.87% higher. For 11 months, this comes out to an annualized yield of about 2.04%.

Below is an estimated annualized return for I Bond redemption from April 1, 2018 to July 1, 2018. It is assumed you will buy the I Bond on April 30, 2017 which gives you almost an extra month of interest. This effectively reduces the 3-month penalty to 2 months.

  • 2.04% - redeem on 4/1/18, 6mo of 2.76%, 3mo of 1.96%, and 3mo of 0% (penalty)
  • 2.03% - redeem on 5/1/18, 6mo of 2.76%, 4mo of 1.96%, and 3mo of 0% (penalty)
  • 2.03% - redeem on 6/1/18, 6mo of 2.76%, 5mo of 1.96%, and 3mo of 0% (penalty)
  • 2.02% - redeem on 7/1/18, 6mo of 2.76%, 6mo of 1.96%, and 3mo of 0% (penalty)

Note, it's best not to wait until the last day of the month to buy I Bonds at Treasury Direct. You probably want to give yourself at least two business days to ensure they are officially purchased before the end of the month. I did an experiment in 2011 to see how close to the end of the month one could wait (see the middle of this post).

I Bond Purchases AFTER April 2017

We won't know the I Bond fixed rate until May. I doubt we’ll see much change from its current value of 0%. It has been 0% for most of the time since 2010. You can review this history of I Bond rates at this TreasuryDirect page. Remember that this fixed rate lasts for the life of your I Bond.

If the fixed rate stays at 0%, the May I Bond composite rate will be 1.96%. That will be your I Bond rate for the first six months if you purchase in May. We’ll have to wait until mid October to know the inflation component for the next six months.

Remember the $10K Annual Purchase Limit

Don’t forget that the annual purchase limit is $10K (excluding the purchases using your tax refund). Also, remember that the Treasury ended offering paper savings bonds at banks. However, it did double the annual purchase limit at Treasury Direct (see post).

How It Compares to Today’s CDs

If you earn 2.03% APY for 12 months on $10K, the total dollar amount of interest is about $203. In today’s environment, you can easily get a 12-month CD with a 1.50% APY. If you invest $10K in this type of CD, the total interest earned would be $150. So you won't make that much more with the I Bond. Also, for longer CD terms, you can get higher yields. For example, Navy Fed still has a 17-month CD special that earns 2.00% APY. Nevertheless, I Bonds have some nice features that CDs don't have such as being exempt from state and local income tax.

I 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
  • $10,000 maximum of I Bond purchases per year (excluding purchases using your tax refund) - total was $60,000 before 2008 (Treasury's press release).

For more details about the purchase limit, please refer to the Treasury Direct's FAQ on the new purchase limit.

Comments
deplorable 1
deplorable 1   |     |   Comment #1
I long for the days of the old EE savings bonds. They were actually a pretty good deal. With a fixed rate of 0% you are completely dependent on the government's inflation numbers to determine your yield. I'll stick to CD's for now until they start paying a better fixed rate of return.
Róbert Dávid
Róbert Dávid   |     |   Comment #12
If you are in a high state/local tax area (CA, NYC..), keeping the I bonds for 1 year is practically better than any CD out there.
Bogey
Bogey   |     |   Comment #13
I also long for the days of the old EE savings bonds. Especially those paying 6% many, many years ago.

When we were kids, we received a series EE bond on our birthdays from when we were one year olds. Fore many years we didn't even know what they meant. Thanks to mom and dad, those EE bonds helped finance our college educations.
dave
dave   |     |   Comment #15
deplorable, you will be waiting a long time for cd rates to raise. Remember trump wants low rates and when the stock market and real estate crashes due to 9 years of low rates people will be flocking to bonds who's rates will be driven down. CD rates will be super low even if we get tax cuts next year.
barry_NY
barry_NY   |     |   Comment #36
Trump wants normalized interest rates. About the week he first announced his candidacy, he called Janet Yellen a politician for keeping 0% interest rates so that Obama can print money. Yellen will no longer be Chair of the FOMC in a few months, and Trump will have several appointments to the FOMC, that will once again make the Fed independent.
LuvCD
LuvCD   |     |   Comment #37
Spoiler Alert: Real Estate people like low interest rates and "normal" for the last 9 years is what the new normal is!
steved
steved   |     |   Comment #26
Do EE savings bonds no longer exist? They seem to be available for sale. Of course they don't pay the same interest rates we remember as kids, but, neither do CDs.
LuvCD
LuvCD   |     |   Comment #27
Those are the hardcopy bonds that can be purchased with tax refund...see other comments.
Kaight
Kaight   |     |   Comment #2
I have technical questions for the experienced (which I am not):

My best understanding after opening my Treasury Direct account a few days ago is that they will do an ACH pull from your (bank or CU) account to fund whatever you purchase. I gave them my ABA routing and account numbers. They did no trial deposits/withdrawals to ensure the ACH link was properly established. Is that normal? I mean, I realize it is not smart or prudent to omit the trial deposits/withdrawals, but is that nevertheless normal for Treasury Direct?

Also this question:

If I order my bonds today, and assuming all well with the ACH link, when do the bonds effectively settle in and become part of my Treasury Direct account?
LuvCD
LuvCD   |     |   Comment #3
After I first opened our accounts several years ago...I believe my first purchase was $50 to test the system. Went smoothly and then went in with both feet. Transactions usually done the next day. I did set up another checking acct, i.e. not my primary one, in case something happened..if you get my drift. AND, for sure I don't have overdraft protection...if "someone" overdraws, it bounces! 1099s are eposted too.
Kaight
Kaight   |     |   Comment #6
Thank you. Your answer is most helpful.
Bozo
Bozo   |     |   Comment #4
In my humble opinion, I-Bonds are needlessly complex. The annual maximum contribution limits, the "backdoor" with tax refunds, the holding period, the fluctuating inflation component, dealing with TreasuryDirect, it just sends my head spinning.
LuvCD
LuvCD   |     |   Comment #5
Soooooo, where do you park idle cash for a year?
Bozo
Bozo   |     |   Comment #7
Alliant Credit Union. The web-site is ever so simple. You can plop funds in a savings account and move them to checking with the click of a mouse. No fees, no gimmicks, no per-check charge. At my age, simplicity is a "plus".

For idle IRA cash, for folks over 59 1/2, the "no-brainer" option is  StateFarmBank's five-year IRA CD. With a rate of 2.3%, partial withdrawals, and no EWP, it's worthy.
LuvCD
LuvCD   |     |   Comment #8
Got it! Max of 1.05%
rdub
rdub   |     |   Comment #9
The $10k limit is a big buzz kill in my opinion. This(Ibonds) is generated toward the individuals who want to invest with little capital. We need to move $500k in transactions to make it worth our while. The Andrews CU was a good example as they did not have any limits and that was a god send for us. The bottom line here is money never sleeps.
Bozo
Bozo   |     |   Comment #10
rdub, "buzz kill" is appropriate.
bozo
bozo   |     |   Comment #11
Historically, I-Bonds were touted as savings vehicles for "small savers", Somehow, they morphed into actual investing vehicles. Folks would game the system by the tax returns. I mean, seriously?
Att
Att   |     |   Comment #14
I find it kind of humorous that they allow you to purchase more bonds with a tax refund. That money is not earning any interest while the government has your money for the year. Many people don't understand that the refund is for overpayment of taxes. Guess it's a way for undisciplined people to save. I strive to get no refund and would rather pay at tax time as I get the use of the funds. You do have to make sure that you with old at least 90% of what you owe or make quarterly payments. This year between the 3 states we pay taxes we are getting almost $0 back.
Kaight
Kaight   |     |   Comment #16
I understand your perspective. And I am not arguing here for, or against, purchase of I bonds. But for persons who wish to increase their yearly $10K limit the refund loophole is valuable. To wit:

It is possible to "engineer" a refund at low risk and without very much cost. You do this by purposeful, very late, overpayment of tax. At one time I thought overpayment would raise red flags at the IRS. I was wrong. And certainly with an overpayment as small as $5K there would be no problem.

I learned about the overpayment game only recently. It came up because I have the BBVA Compass NBA card which offers, only twice each year during brief intervals, a 5% reward for spending up to $5k. So I "prepay" tax when the opportunity presents itself. Of course it is not necessary to pay off my card right away, which is why "prepay" is in quotes. The IRS is paid, but I do not end up paying until (roughly) when I would pay anyway, or even later.

One year, before I learned the ropes, and through error, I overpaid my tax.  I telephoned the IRS emoting apology, worry, and concern, only to learn (from a very nice IRS rep) that my angst was unfounded. I was so full of prunes!! Bottom line, anyone wanting to overpay in order to secure an extra $5k refund for I bonds should be just fine. Just don't do it early.  And of course you can only play the game once each year, just prior to April fifteenth.

There are no dull moments in this life, and there is a new wrinkle around every corner.
Bozo
Bozo   |     |   Comment #18
You can "game the system" to get that extra I-Bond by using estimated tax voucher #4. It's not rocket science. You "overpay" with voucher #4, then, the overpayment can be used to fund the I-Bond in your refund.

Which begs the question: why would the Department of the Treasury make "small savers" jump through hoops to help finance the Federal Debt?
LuvCD
LuvCD   |     |   Comment #19
Or, take ira distribution late and have too much tax withheld
Kaight
Kaight   |     |   Comment #25
Agreed, Bozo. But using voucher #4 timely (Jan. 15th) is an early overpayment in my view. I have never overpaid that early. My own purposeful overpayments are done in February by CC (with profit owing to the reward), the ultimate (actual) payment being delayed until first of April when I must pay off my CC.

Here is what I learned by accident:

Overpayments do not need to be submitted beneath the classification of quarterly payments. Instead, you simply submit the overpayment, whenever you wish, as a payment of prior year's tax. Then, when you file, you include the overpayment in your quarterly tax total on your 1040. This is what freaked me out first time I did it, since the overpayment was not technically a quarterly payment having been submitted later. What I learned is that the IRS does not care.

The one wrinkle I had, since I overpaid so late, was need prior to filing my taxes to ensure my overpayment had been received and credited.  This required a telephone call to the IRS to check my total prior year payments.  But the call went smoothly and I was able quite easily to know, prior to filing, that they had my payments, overpayment and all.  With that matter nailed down filing was a breeze and everything went very smoothly.
???
???   |     |   Comment #35
I ONCE Overpaid the entire next year taxes on the 1st Estimated Tax Coupon, under the impression of satisfying the Safe Harbor clause. I made a few extra dollars in interest during the year and came up "short" on Est Pay. IRS had figured for the 4 quarters when I filed,so as the year went on they kept deducting per quarter which at the 3rd quarter exhausted my funds. From then on applying the accruing penalties.

I called IRS and they said agreed I satisfied Safe Harbor and had to file amended return. Moral is be sure you figure extra income. At least I didn't OverPay
FiledExtensioinForPaperBonds
FiledExtensioinForPaperBonds   |     |   Comment #21
All you need to do is do your taxes, but file an extension and pay enough such that you will get a refund. Once the IRS has withdrawn the money, submit the return showing that you paid enough with the extension to get a refund.
deplorable 1
deplorable 1   |     |   Comment #24
Same here. I keep trying to explain this to people but the ignorant masses don't seem to get this concept. They think it is wonderful to get a $10,000 tax refund. When I tell them you just gave the federal government a one year interest free loan they get this blank deer in the headlights stare. Maybe I look at things differently being the son of a CPA.
Anony
Anony   |     |   Comment #34
I adjust pension taxes so we owe money and then simply pay the small penalty. The idea of paying more to get a few more bond dollars seems like an inordinate waste of time. And...where did the 4th quarter money come from? You're correct...why loan the government?
Kaight
Kaight   |     |   Comment #17
Just as a heads up for anyone trying to time this purchase, as I am:

The Treasury Direct ACH cutoff is apparently prior to 2:30 ET. If you submit a purchase thereafter, it moves over to the next business day. I still do not have the exact Treasury Direct ACH cutoff time. But if you are too late they give you fair warning allowing cancellation of the buy. This is helpful.
xxx
xxx   |     |   Comment #20
Well, iBonds are certainly a better way to go than TIPS right now. Today's auction resulted in a NEGATIVE yield. Pretty much anything is better than that.
fafafafa
fafafafa   |     |   Comment #22
Humorous note; the IRS Form 8888 is for Allocation of Refund (Including Savings Bond Purchases). No. 8 has long been regarded as the luckiest number in Chinese culture. With pronunciation of 'Ba' in Chinese, no. 8 sounds similar to the word 'Fa', which means to make a fortune. It contains meanings of prosperity, success and high social status. Not coincidental... the numbering of the form.
john
john   |     |   Comment #23
pure garbage
Really?
Really?   |     |   Comment #28
Meaningless.....with a $10K max. Not worth it.....Not even close
LuvCD
LuvCD   |     |   Comment #29
Then where do you park idle cash, e.g. $25K each year?
Bozo
Bozo   |     |   Comment #30
For a married couple (two SSNs), it is theoretically possible to buy $30,000 in IBonds each year. $10,000 X 2 with direct purchase, and $5000 X 2 with Form 8888. Over a thirty year period, that adds up to serious bucks. I'm not a huge fan of IBonds, but I can see the logic.

Which begs the question (as noted above): if $30,000 per married couple ($15,000 per SSN) is the limit, why not just allow folks to buy $15,000 in IBonds each year (per SSN) and be done with the charade of Form 8888.
Bozo
Bozo   |     |   Comment #31
PS: I found this laugher on the FAQ page:

"Why is there a purchase limit on savings bonds?

The purpose of the savings bonds program is to provide individuals with a way to save or invest relatively small amounts of money in non-marketable Treasury securities."

I guess it's all in what one defines as "small amounts of money".
Bogey
Bogey   |     |   Comment #32
Yep, "small amounts of money" is a relative term. "X" amount of money could be a fortune to some people and just a pittance to others.
Kaight
Kaight   |     |   Comment #33
I agree with Bozo here. While $30,000/couple/year is not a fortune for many, it remains a respectable amount of money. Add in the absolute security of I bonds, even protection from fraud (not offered by FDIC or NCUA), together with the state tax exemption, and you have an opportunity worthy at least of some consideration. All that goes double for persons living in high tax states such as CA and NY and others, and as well for urban denizens who confront city taxation in addition.

When I see money lying in the street I bend over and pick it up.