April Series I Savings Bonds - Just Below Top 1-Year CD Rates

POSTED ON WEDNESDAY, APRIL 11, 2018 BY Ken Tumin

The Labor Department released the March CPI-U numbers today, and with these numbers, the next I Bond inflation component can be computed. Inflation as measured by the CPI fell 0.1% in March due to lower gas prices. However, the Core CPI that excludes energy and food went up 0.2% which matched what economists had expected. The 12-month Core CPI rose 2.1%, which is its largest 12-month increase in more than a year. This inflation news should keep the Fed on track for at least two more rate hikes in 2018.

Based on September and March CPI-U numbers, the inflation component for the May I Bond should be 2.22% (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 2.48%.

I Bond Rates of Return for April 2018 Purchase

If you buy I Bonds before May, your I Bond will have a fixed rate of 0.10% and an inflation component of 2.48%. Thus, the composite rate is 2.58%. This rate will remain in effect for six months until October 1, 2018. 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 CPI News Release Archive. The CPI-U for September 2017 was 246.819. The March 2018 CPI-U was 249.554. This is an increase of 1.11%. The annualized version of this is 2.22%.

If you buy before May, you'll receive the current I-Bond fixed rate of 0.10% 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 2.48%, and the composite rate is 2.58%. Here's an estimate of the return for the next year:

2.58% from April 2018 through September 2018
2.32% from October 2018 through March 2019

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, 2018 (best not to wait to the last day), the redemption value of the I Bond on April 1, 2019 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, 2019 to July 1, 2019. It is assumed you will buy the I Bond on April 30, 2018 which gives you almost an extra month of interest. This effectively reduces the 3-month penalty to 2 months.

2.04% - redeem on 4/1/19, 6mo of 2.58%, 3mo of 2.32%, and 3mo of 0% (penalty)
2.06% - redeem on 5/1/19, 6mo of 2.58%, 4mo of 2.32%, and 3mo of 0% (penalty)
2.08% - redeem on 6/1/19, 6mo of 2.58%, 5mo of 2.32%, and 3mo of 0% (penalty)
2.10% - redeem on 7/1/19, 6mo of 2.58%, 6mo of 2.32%, 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 2018

We won't know the I Bond fixed rate until May. With the rising interest rates, it’s possible that we’ll see a slight increase in the I Bond fixed rate. Based on the fixed rate history, I doubt we’ll see any significant increase. If you think it’s likely that you’ll keep the I Bond for the long-term, a higher fixed rate will be more important to you. Thus, you may want to wait until May. 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 0.10%, the May I Bond composite rate will be 2.32%. 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

These I Bond yields for terms of 11 to 14 months are very similar to the I Bond yields from a year ago. The difference between now and then is that CD rates have risen substantially. A year ago, a top rate for a 1-year CD was 1.50% APY. Now, a top rate for a 1-year CD is around 2.25% APY. Thus, buying an I Bond now just for a short-term CD alternative isn’t a great deal. I Bonds do 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

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48 Comments.

alan1 | Apr 11, 2018 | Comment #1

According to the article:
"If you buy I Bonds before May, your I Bond will have a fixed rate of 0.10% and an inflation component of 2.48%. Thus, the composite rate is the same as the inflation rate of 2.58%."

Maybe I just need to drink more coffee, but I do not understand how the fixed rate + the inflation component can = the inflation rate, unless the fixed rate is 0. But the fixed rate is 0.10%. Seems to me that the composite rate (fixed rate + inflation component) is greater than the inflation rate, by 0.10%.

Ken Tumin | Apr 11, 2018 | Comment #2

Sorry for the error. It's corrected now. Thanks.

E pluribus unum | Apr 11, 2018 | Comment #3

What I like about these I bonds is that they last a long time. Unlike with a CD, you are not obligated to pay Federal tax on your interest yearly. Instead, you pay tax only when you finally cash your bonds in, and of course you never are obligated to pay state tax. So these things provide a good way to postpone payment of tax for a number of years.

scottj | Apr 11, 2018 | Comment #4

Not reporting income is why I max out on what I can purchase every year. I retired 8 years ago so no W2 income, and looking poor gets me more in healthcare tax credits and College Aid for daughter. So since I plan on holding these long term I will wait for May to purchase and hope for higher fixed portion

DCGuy | Apr 11, 2018 | Comment #8

I have a large amount of Savings Bonds that were purchased in the 1990s that will reach final maturity in a few years, so will have to report a large interest payment over several future tax years. Since they will be 30 years old, the redemption value could be more than twice the face value of the bonds.

anonymous | Apr 12, 2018 | Comment #16

DCGuy (re comment #8), and since they were likely issued at half of face value (EE?), your savings bonds may have actually quadrupled in value! (If they are EE, they would have automatically doubled in value in less than 20 years.)

DCGuy | Apr 12, 2018 | Comment #20

anonymous (#16) - Majority of the bonds are I Bonds which were purchased at face value. Some of the earlier ones are EE bonds. The H and HH series are kaput, so cannot convert to other series.

??? | Apr 12, 2018 | Comment #17

DCGuy # 8
How is it that you plan to report interest to IRS over several tax years??
Taxes are due in the year they mature and penalties are imposed if not.

DCGuy | Apr 12, 2018 | Comment #21

??? (#17) - I did not opt to report interest over the years, so it will be a lump sum reporting at maturity Yes, each year will require federal income taxes (but not state income taxes) to be shelled out from he distributions. The institution where you cashed them will send you a Form 1099-INT and the only way to avoid getting taxed is by claiming that the bonds were used for education expenses (at least for me that was decades ago).

??? | Apr 13, 2018 | Comment #25

Had to do the lump sum reporting myself for EE Bonds from the mid 80s.
Cashing 40k of EEs out really killed me on estimated taxes being paid using Safe Harbor method for a few years. My income is interest only

DCGuy | Apr 13, 2018 | Comment #31

That is the quandary that you end up with a large quantity of bonds that matures at the same year. May have to send out the Form 1040ES form which I try to avoid at all costs, but with a potential large Form 1099INT to be issued in the future, I will have to look into that. At least the underpayment penalty could be minimized since the taxable income in the previous year is expected to be very small, so could use that to waive the underpayment filing rules.

CuriousDave | Apr 13, 2018 | Comment #27

Instead of picking up a large lump sums taxable in the years of maturity, you can opt to be taxed on some or all of your I Bonds annually, beginning this year. That may help guard against landing in high tax brackets in the years of maturity. A tax pro can do some projections for you from now through the maturity years to see whether that will work.- or, if you are tax literate and proficient with spreadsheets like Excel, you can try do the projections yourself.

alan1 | Apr 13, 2018 | Comment #32

CuriousDave -- You wrote: "... you can opt to be taxed on some or all of your I Bonds annually, beginning this year." I was unaware of this purported change in the tax law. Previously it was all or none -- you could not choose to be taxed on only some of your I bonds. Treasury Direct's website does not reflect this change.

Would you please provide a source for your assertion that, beginning this year, you can choose to be taxed on some of your I bonds (rather than all or none). Thanks.

Ray | Apr 13, 2018 | Comment #33

You don't have to cash them all in the same year. Spread them over several years to keep yearly income lower.

DCGuy | Apr 14, 2018 | Comment #34

Yes, that is another option to control the amount of taxable interest in a group of bonds. However, people who do not like holding money in bonds earning zero percent will argue against doing such a thing. It would be akin to leaving the money into a near zero account at the big B&M banks or a MM account a few years ago yielding close to zero percent.

anonymous | Apr 14, 2018 | Comment #35

DCGuy, I'm confused. Why not cash some of them in a few years before final maturity so you can spread out the income? Basically, you can control the year when the savings bond interest is due by cashing in the bonds "early." The only time you're not in control is when you wait until maturity of the savings bonds, then you have to report the income in the year of maturity. (You're supposed to report income in the year of maturity even for some reason you do not cash in the bonds until later.)

??? | Apr 14, 2018 | Comment #36

#35
Actually I believe that if 1099 bond interest income is not reported in the year of maturity that you are subject to unpaid taxes. I guess if the lump sum redemptions over time are not caught by IRS you might get away with it'

??? | Apr 14, 2018 | Comment #37

Sorry I meant #33

Inflation Hawk | Apr 14, 2018 | Comment #38

Not really. It's 0% for the fixed component plus the inflation component. That's kind of the whole point of the iBonds (that's what the i stands for).

Inflation Hawk | Apr 14, 2018 | Comment #40

Actually, this isn't anything new. From the treasury direct site:
"Savings bond interest is subject to federal income tax; however, taxation can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first. You also have the option of claiming interest annually for federal income tax purposes."

??? | Apr 14, 2018 | Comment #43

OK Hawk #40
What Tax circumstances could arise if you did Not cash bonds at maturity?

anonymous | Apr 17, 2018 | Comment #48

#43, the circumstances that could arise are that you need to amend your return for the years when your bond matured and pay back taxes and penalties.

However, I found the advice in this article very helpful: http://www.foxnews.com/story/2005/06/27/saving-yourself-savings-bond-headache.html

It basically describes that in many such situations, if it is an honest mistake discovered years later, it may suffice to report it in the year that the bond was cashed in. My understanding is that the 1099 will have the year in which the bond was cashed. I would not be surprised if most people in that situation wouldn't even be aware when they receive the 1099 that technically, they should be amending a prior year's return to report that income.

??? | Apr 17, 2018 | Comment #49

#48
That simple article was a great summation of the complete process I was looking for.
Much appreciated.

E pluribus unum | Apr 17, 2018 | Comment #51

We have, what is it, three years to file a 1040X? I think that is right. And the IRS, similarly, has just three years to come after us for back taxes owed . . . . subject to the 25% rule, of course, if I recall correctly.

So in the instance of long-ago-owed tax on US Savings Bonds, provided the amount owed does not violate the 25% rule, I think the obligation can be safely ignored. Just pocket your profit and smile. It's all legal and there is nothing the IRS can do about it.

ETA

Just checked the law. Even if the 25% rule is violated, that gives the IRS just an additional three years to come after you (total of six years). Only if you filed your original return with fraudulent intent, not at all likely to be the case with unreported US Savings Bond interest, does the IRS have unlimited time to seek you out and punish you. So:

Bottom line old US Savings Bond interest will, in many instances, be tax free.

E pluribus unum | Apr 11, 2018 | Comment #10

Hey, scottj

Am curious to know what "max out" means to you. Specifically, does this mean $10k for you and another $10k for your wife . . if you have a wife.

Or, instead, are you going whole hog and doing the Federal income tax overpayment thing so you can buy the most I bonds possible by using your tax refund?

Myself? Well, I have just gone the $10k/person route so far. But I am actively considering the tax refund thing. Maybe next year. For those with a "spouse in the house", the tax refund approach can get you up to $30k/year of bonds AFAIK.

Mostly I just do CDs. But these I bonds provide a practical alternative IMO, and your bond portfolio will build up over time, though patience is required.

Inflation Hawk | Apr 14, 2018 | Comment #39

I believe the tax refund is limited to 5K per return, not per person.

E pluribus unum | Apr 17, 2018 | Comment #50

That's an excellent comment and it makes sense . . . although I've not checked to be certain. But it seems like a couple might have to file separately . . which is uncommon . . in order to obtain an extra 5k bond candidacy. Good catch!

tightwad | Apr 11, 2018 | Comment #5

Not bad......But I have a 2.5% CD I can add to any time. That's close enough. Besides.....who really cares about $10,000?? Why don't they do away with this low max amount you can invest?? Don't get it.......unless maybe they don't want the "unwashed masses" investing in anything tied to inflation.....after all they love inflation-makes it cheaper to pay down their massive debt. Pass but thanks......not interested.

Att | Apr 11, 2018 | Comment #9

Tightwad I agree for 10K bonds not worth the bother. I actually have some EE bonds that are paying 4% that will hit the 30 year mark this year and no longer pay Intrest so I will be cashing them in.

mix | Apr 12, 2018 | Comment #18

Your 2.5% is close enough today... but not next year when interest rates say jump to 10% overnight... The I-Bond limit used to be $60k per year. If it was such a bad deal you'll have to ask yourself why the government reduced the limit.

DCGuy | Apr 12, 2018 | Comment #22

The purchase limit was reduced to $10K per SSN because the US Treasury said that the majority of the bonds were bought in under $10K amounts per person annually and were mostly used for gifting purposes. The Savings Bond payroll savings plan never got much participation in the Federal Government. They want to "funnel" all of those who used Savings Bonds as an investment to move over to Treasury securities (T-Bills, T-notes, and T-bonds). There you can buy as much as you want, but it will be at the current auction prevailing rates. Savings Bonds were looked more like an introductory money gift to young children (I had a granduncle to gave them to my sister and I when we were young). I only bought large quantities back in the 1990s to early 2000s because the interest rates then were rater high and I wanted something that had the flexibility of a 1 year CD, but also could be held up to 30 years (sort of like a hybrid between the 1 year T-Bill and the 30 year T-Bond), Since they offered a good base rate back then, they were a good buy. Now, the program and rates have radically changed, so I don't bother buying them now.

mix | Apr 16, 2018 | Comment #47

$10K isn't much I agree. But this isn't about paper notes, T-Bills, T-notes, or T-bonds, this is about inflation protection and capital preservation (for me at least) with no risk. TIPS would be comparable.

https://www.bogleheads.org/wiki/I_Bonds_vs_TIPS

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deplorable 1 | Apr 13, 2018 | Comment #24

You could put that $10,000 to work over at Citibank for their $400 bonus and do much better.
https://www.doctorofcredit.com/citi-400-600-personal-checking-savings-bonus-available-nationwide-direct-deposit-not-required/

CuriousDave | Apr 13, 2018 | Comment #28

About 20 years ago the maxes were raised so much that high rollers were using them as a conservative addition to their retirement plans because of the interest deferral. So many people were shifting money out of the commercial banks into these bonds that these institutions were complaining that the Treasury was unfairly competing against them. Also, in those days the banks handled most of the applications for purchase and redemption of Savings Bonds, and not only were the bonds competing with their own CDs, they also received no commissions or other compensation for their participation. Savings bonds were never intended to be a major form of investment for high rollers. They were much more popular as a form of introducing youngsters to concepts of long term saving and the power of compound interest, especially as rates then were so much higher than now. Grandchildren would often be gifted Savings Bonds in small face value denominations like $25.

Inflation Hawk | Apr 14, 2018 | Comment #41

However, you can build-up an inflation hedge over time. After 10 years, that's 100K per individual. For a couple, 200K. Besides the inflation hedge, they've got a lot going for them. You can cash them in after a year with a paltry 3 month penalty. After 5 years, there's no penalty. So, its not like you have to keep them for 30 years.

Basically, if you're loaded and don't need to do anything but tread water relative to inflation until you die, they're a great little tool to do that. For an ultraconservative person like myself, they're a nice flexible component to my taxable cash holdings. TIPS, iBonds and CD's are all I need at this stage in my life.

I use them as a inflation protected piggy bank for unexpected expenses. This prevents having to make a withdrawal from retirement accounts where I would get taxed on the whole withdrawal. At least with iBonds, you're only taxed on the interest.

Lrdx | Apr 11, 2018 | Comment #6

It will be a lower rate than the current, while treasury rates are generally rising. I wonder if they going to increase the fixed part too.

CuriousDave | Apr 13, 2018 | Comment #29

It depends on whether the Treasury is serious about keeping the product around in future. If it is, at some point it will need to increase the fixed portion if it wants to keep the bonds competitive with the rest of the fixed income marketplace. Right now the composite rate is more or less in line with 5 year CDs, but if the Fed holds to its plan for more rate increases this year, odds are that the fixed rate component of I-Bonds will rise as well.

Lrdx | Apr 11, 2018 | Comment #7

The rate will be lower than the current, while treasury rates are generally rising. I wonder if we should expect an increase in the fixed part. I wouldn't hope more than +0.1% though.

anonymous | Apr 12, 2018 | Comment #11

TIPS can be considered as an alternative to I-bonds. The 5-year TIPS had a substantial real yield increase over the last half year and is now hovering around 0.6%. It's not comparable to pre-2009 levels but is the highest since then. This 0.6% rate is the equivalent to the I-bond's 0.1% fixed rate, so the 5-year TIPS will yield about 0.5% more if held to maturity, compared to the I-bond.

The TIPS can be sold at any time and has no purchase restrictions, but of course the difference to I-bonds is that it is a marketable security, so its selling price can vary. The price will be sensitive to changes in the real yield curve. Real yields appear to be on their way up (?) so the value of existing TIPS will generally be expected to drop.

As a former TIPS owner, I should also mention that TIPS have some unique tax issues, such as OID, that might make your taxes more complicated if you hold TIPS in a taxable account.

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oner | Apr 12, 2018 | Comment #19

Can you gift these to a charity and thus avoid paying federal income tax?

DCGuy | Apr 12, 2018 | Comment #23

oner (#19) - yes, you can, but it can be a little complicated. US Treasury does not allow a charity to be named as co-owner or beneficiary of the bonds. The most direct way of minimizing taxes is by reporting the interest on your tax return and also including that amount on the charitable contribution line of Schedule A. You can also bequeath them or place them into a charitable trust. Here is an article discussing these options.
https://finance.zacks.com/can-donate-saving-bonds-charity-avoid-paying-accrued-interest-6044.html

CuriousDave | Apr 13, 2018 | Comment #30

Because of the new Tax Reform rules, many people who itemized their deductions in the past will find that their 2018 itemized deductions are lower than their new standard deductions. For them, gifting I Bonds to charity will not help, so oner may want to project his//her 2018 tax deductions to see how that works out.

Att | Apr 13, 2018 | Comment #26

Bonds also have other tax advantages that are income dependent:

The savings bond education tax exclusion permits qualified tax-payers to exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE savings bonds and Series I savings bonds issued after 1989, when the bond owner pays qualified higher education expenses at eligible institutions.

phillyguy | Apr 19, 2018 | Comment #52

Do you think I bonds are a good place for emergency cash needs?

Nothing | Apr 19, 2018 | Comment #54

Good place to park some petty cash! Done it for years and if ever the 6month rate is "bad," I cash some in...no state tax.

E pluribus unum | Apr 19, 2018 | Comment #53

I bonds are as safe as the USA. Feel free to be the judge of how safe that is, but many people think of the USA as safe. Thus, seniors seeking safe means to fight back against the IRMAA have a friend with I bonds. This is because, unlike with CDs. interest earned on I bonds need not be reported yearly. And I bonds bought today will out live most of their senior citizen purchasers.

Of course in a pinch your I bond money will be there for you and can be accessed readily. This even though the yearly interest earned will not add to your IRMAA woes. And the I bond interest rate, while not spectacular, isn't horrid either.

I Bond Rates of Return for April 2018 Purchase

I Bond Purchases AFTER April 2018

Remember the $10K Annual Purchase Limit

How It Compares to Today’s CDs

I Bond Features

More Past Offers