5 Years Cd Verses Ibonds

Dingdong | Jul 28, 2022 | 13 posts since 2021

I'm debating with my self to invest in a 5 year cd which I found maximum pays 3.55% or Ibonds. Ibonds currently pays 9.62% and in my opinion the inflation is going to come down gradually not suddenly so 9.62% rate also will come down gradually , may be next year they might declare 6% and following year 5% and so on.

Now in 5 year cd @3.55 × 5 , so that's total of 17.55% and let's say with ibonds 8% for next 12 months and than ave 7% following 12 months, 5.5% average following 12 months so in 3 years my total return is already more than (8+7+5=20%) 5 years cd. And the 2 years money left in I bonds whatever I make is my extra profit. One more thing about early withdrawal penalty. In 5 year cd its 180 days of interest whereas in ibonds its 3 months of interest in case if I ever need money.

Please share your thoughts on this strategy.

Thank you

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Answers

GreenDream | Jul 29, 2022 | 347 posts since 2019

Ibonds are certainly the better choice currently, IMO. The 9.62% rate is likely to be followed by another high rate (with just the numbers where they are today, we're looking at 6+% for the next ibond rate), so you are looking at the first 12 months of the ibond beating the pants off of anything CDs currently offer.

And remember, the early withdraw penalty is taken from the newest interest not the oldest. so if you had 9+%, 6+%, and 1% interest for the first 18 months of the bond, you could hold the bond for 15 months to collect all the high interest from those first 12 months and take all the penalty from the lower 1% interest that was given in the last 3 months.

My recommendation, for what it's worth, is to max out your yearly ibond purchase (if you haven't already). Only after that would I take CDs into consideration.

highly_intrestd | Jul 29, 2022 | 23 posts since 2022

The predicted iBond rate for November 2022 is 12.4% based on the first 3 CPI-U monthly figures. So if you buy them now you get the 9.62% thru October and then 12.4% in November (forecasted) for an average of about 11% for the next year. Now I don’t see rates plummeting after that but they will go down, but still beating the CD rate for next 2-3 years after next. Also note, while you can only contribute to an iBond $10k per year per person, you can always open gift accounts in $10k increments for a spouse or anyone else and put as much as you want there, restriction being you can only gift $10k to that person per year, but you are still generating the massive interest while they sit in the gift box account. So say you’re married with $100k to invest. You and your spouse contribute $10k each to your own accounts this year and put in $40k each as gifts to each other to be delivered each of the next 4 years. You are generating 11% this year alone which is $11k and compounding with the next rates, by year 5 you should have much more than the $19k+ (compounded) the CD gives you. Good luck!

Ltssharon | Jul 30, 2022 | 299 posts since 2020

If you ‘gift ‘ an ibond say, to a child, do you yourself get the int?

highly_intrestd | Jul 30, 2022 | 23 posts since 2022

Gifts don’t apply to your own kids. You’ll have to open a linked minor account in their name and deposit the money there until they are 18, they will keep the interest generated. Read this informative article about gifts. https://thefinancebuff.com/buy-i-bonds-as-gift.html#htoc-gift-to-kids

Ltssharon | Jul 30, 2022 | 299 posts since 2020

Oh, my children are adults with their own children. I will read the article. Thank you so much.

highly_intrestd | Jul 30, 2022 | 23 posts since 2022

So you can set up a gift account for your grandchildren, and your kids can set up their own accounts. You can gift to anyone except your own kids.

GreenDream | Aug 1, 2022 | 347 posts since 2019

Where do you get the idea that you can not gift to your own kids? per the TD website, you can gift to anyone (a TD account, either their own or a linked account for a minor is required to receive the gift)

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ifaq.htm

"If you purchase an electronic I bond as a gift, you must provide the recipient's Social Security Number. The gift recipient must open or already have a TreasuryDirect account in order for you to be able to transfer the bond to that person. If the recipient is a minor, a parent must open a TreasuryDirect account and establish a Minor Linked account. You will deliver the gift bond to the Minor Linked account."

While it wouldn't be necessary for you to use the gift function if you are the parent who controls the minor linked account, as you could simply purchase from the linked account on your child's behalf, remember there's two parents. The one for whom the account isn't linked may have reason to use the gift function (particularly in the case where the parents are divorced).

lou | Aug 3, 2022 | 1,070 posts since 2010

Slight correction: If you buy now, you will get the 9.62% for the next 6 months and whatever the rate is that is announced in Nov (12.4%?) for the subsequent 6 months. You could wait until the end of October when you will know what the Nov rate is and buy the ibonds then. This way you will know exactly what the rates will be for your ibonds for the next 12 months.

FirstNation | Jul 29, 2022 | 85 posts since 2021

Go for the iBond.
You're getting a better rate for now and the forseeable future.
After you maximize you iBond purchases for the year, I would have said go with TIPS over CD's.
But the TIPS yields went negative today.
So much for the rest of my plan this year unless the yields go up again.

MAKNYC | Jul 29, 2022 | 237 posts since 2015

Shouldn't your real question be where do you think the 4/5 year CD rate will be in approximately 11 months? In the immediate term the i-bond likely wins easily, so unless you expect the Fed to reverse course (cut) very quickly (i.e. less than the 11 month minimum holding period for the iBond) you could invest in the iBond today, and in 11 ish months you have the option to cash out the iBond at any point and invest in a 5 (or perhaps 4 year) CD at the time that you think rates have peaked and are likely to decline. And even if you call it slightly wrong, so long as you get anything over 2.5ish % on the CD when you open it, you still came out ahead because of the premium interest you received for the first year on the iBond.

Ally6770 | Jul 28, 2022 | 3,526 posts since 2010

Another consideration-- Both can compounded but you must pay tax on the CD yearly but have a choice on the I Bond. You don't have to pay tax until you cash it in. Is it better for you to pay tax yearly or when it is cashed in. The I bond pays for 30 years but you will be able to cash in it after one if you want after one year with only 3 months penalty. No penalty after that and rates may be higher.

Choice | Jul 29, 2022 | 937 posts since 2020

Your logic is incomplete. Interest rates in the abstract is one thing but as applied to what? The minimum Ibond is $10K for an account each year but most have multiple accounts, etc. So rates are one thing but not the entire story...in particular, i.e. where will one be in 5 years? It would be on the basis of a rate times x dollars...ergo, go back to the drawing board and, more importantly, what are you going to do in 5 years for either!!! Then what is the effective rate of a 5 year CD at various exit strategy points, i.e. DA will not publish your return at various price points but with Ibonds you can stop the purchase at any time. What about idle funds….not put in a CD or ibonds in out years?

GregoryInBelize | Jul 31, 2022 | 120 posts since 2022

Remember Maximum purchase (per calendar year):
Electronic bonds: $10,000
Paper bonds: $5,000
Per taxpayer ID

Choice | Aug 1, 2022 | 937 posts since 2020

It’s per account…not per taxpayer ID. For example a trust may have same tax ID as an individual TD account.

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