TreasuryDirect Security: Should All Financial Websites Be Like This?

TreasuryDirect, which allows individuals to buy securities online directly from the US Treasury, has to be the least accessible financial website in the country. It takes me about 20 minutes to log in each time! Let’s look at all the hoops we get to jump through:

Account number – Of course it can’t be a username you can remember like “bob222″, but is more like Z-334-946-124. This makes me have to dig up my encrypted login/password file.

Password – Use your own keyboard? Nope, you must click it out on a randomized virtual keyboard. Gets around basic keyloggers, but not something that catches your screen as well. I’m actually okay with this one, but I’m glad my password isn’t very long and my vision is good.

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Access Card – Finally, you need to read characters off a Access Card in order to access your account. (Like a secret decoder ring!) Of course, being a physical object, I can never find it. I ended up transcribing the entire card contents onto a spreadsheet file, and shredded the card.

Now, finally you can buy a savings bond. Can you imagine the hassle if every financial institution were like this? I understand the need for security, but I think having a physical type of verification token should be an option for the customer, not a requirement.

Lost TreasuryDirect Access Card?
If you lost your card, you’ll have to call (304) 480-7711, verify your identity, and request for a new one to be sent to your mailing address. Your old card will no longer work. In the meantime, no access. Call early and keep trying until you reach someone, because if they’re busy you have to leave a message (no hold system?), and they never called me back.

Reminder: U.S. Savings Bonds Purchase Deadline

Just thought I’d mention that I used TreasuryDirect today to purchase another $5,000 of Series I savings bonds. If you buy them by the end of April, you can lock in an investment that will get you about 3.08% APR over 11 months. The deadline is fast approaching, and I didn’t want to cut it that close. More details here.

Since the interest on savings bonds is exempt from state and local taxes, based on my tax situation that will bring my tax-equivalent yield to over 3.5%. Not too shabby. I might buy some more, as I think it’s a nice place to store emergency funds – which I see as a permanent cash allocation which I hope not to use – as long as you can wait out the initial lack of liquidity over the first 12 months.

Savings I-Bonds Update: New Inflation (err… Deflation) Rate Announced

New inflation numbers for March 2009 were announced today, so it’s time for the usual semi-annual update:

New Inflation Rate
September 2008 CPI-U was 218.783. March 2009 CPI-U was 212.709, for a semi-annual decrease of 2.78%. Using this official formula, the variable interest rate for the next 6 months will be approximately -5.55%, depending on the fixed rate. What does this deflation mean for the investment returns for I-Bonds?

Buying Now = ~3.08% APR, 11-month investment
If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.7%. You will be guaranteed an variable interest rate of 4.94% for the next 6 months, for a total rate of 5.64%. For the 6 months after that, the total rate will be zero, not -4.85%. This is due to the 0% floor on savings bond rates.

You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur a 3-month interest penalty. However, a known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. Let’s say we buy at the end of this April, hold for the minimum of one year, and pay the 3-month interest penalty for redeeming within 5 years. You’ll be able to sell on April 1, 2010 for an actual holding period of 11 months.

This would leave you with a 5.64% return on your money for 6 months, and then nothing for 5 months. Overall, that’s a 3.08% annualized return, and you will be exempt from state income taxes on the interest as well. This is very competitive with current bank CD rates.

Buying Later? If you wait until May 1st, you will get a new unknown fixed rate minus 5.55%, for a virtually guaranteed composite rate of zero for the first 6 months. (The next 6 months will be based on an unknown rate based on future inflation.) Unless there is a big bump in the fixed rate that makes it a good long-term investment, sticking with banks or credit unions will likely give you a higher yield.

Low Purchase Limits
The annual purchase limit is now $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov. As for paper, here is a post on how to buy paper savings bonds from your local bank. Some larger banks may have an electronic process.

For more background, see the rest of my posts on savings bonds.

Series I Bonds November 2008 Fixed Rate: 0.7%

The new fixed rate for Series I Savings Bonds (“I Bonds”) was announced on Monday to be 0.7%. A few readers asked if I thought this was a good time to buy.

As a long-term investment, a 0.7% real yield makes I-Bonds a poor choice, as you can buy TIPS with much better yields. As of yesterday, a 5-year TIPS had a 3.66% real yield.

As a short-term investment, it depends on how you think inflation will turn out in the near future.

If you buy now in November, you will earn 0.7% fixed + 4.94% based on inflation = 5.64% for the first 6 months. The second 6-month rate will be 0.7% + a variable rate based on inflation from September 2008 to March 2009. So far, the markets seem to suggest that there is a decent possibility that there might even be deflation for this period. Reminders: You must hold for at least a year (or 11 months and a day if you buy on the last day of the month). If you hold for less than 5 years, there is a penalty of the last 3-months interest.

Worst case scenario, there is deflation of worse than 0.7% which makes the total rate zero for the 2nd six months. Earning 5.64% for 6 months with an 11-month holding period gives you only an effective 3.07% APY. If say, inflation is 1%, you’d get an effective 3.54% APY for the minimum 11-month hold. Even if this is exempt from state taxes, the tax-equivalent yield won’t be far above 4%. You can do better with bank CDs.

The only scenario where I-Bonds may be better than what you can get from a bank is if you think annualized inflation will be higher than 1.5% over the next 6 months. Personally, combined with the lack of short-term liquidity, I don’t think I’d take that bet right now.

For more background, see my last post on savings bonds.

Savings I-Bonds Update: New Inflation Rate Announced

New inflation numbers are out, so it’s time for the usual semi-annual update:

New Inflation Rate
March 2008 CPI-U was 213.528. September 2008 CPI-U was 218.783, for a semi-annual increase of 2.46%. Using this official formula, the variable interest rate for the next 6 months will be approximately 4.92%.

Buying Now? If you buy before the end of October, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed an variable (well… total) interest rate of 4.84% for the next 6 months, and 4.92% for the six months after that. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur a 3-month interest penalty.

A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. Let’s say we buy on October 31st. You’ll be able to sell on October 1st, 2009 for an actual holding period of 11 months. (3-month interest penalty still applies.)

Not bad as a place for short-term cash reserves, but not necessarily the best. There are certificates of deposit with comparable interest rates, and you can still access your money early in an emergency.

Buying Later? If you wait until November 1st, you will get a new unknown fixed rate + ~4.92% for the first 6 months, and an unknown rate based on ongoing inflation after that.

Bought already? For those that bought back in April when the fixed rate was 1.2%, the next reset rate will be 1.2% + 4.95% = 6.15%. So we got 4.38% from April-September, then 6.06% from October-May, and now 6.15% from April-September ’09. And this is not counting that the interest is exempt from state income taxes. Yep, I’m keeping these for another 6 months. :)

Beware Low Purchase Limits
The annual purchase limit is now $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov. As for paper, here is a post on how to buy paper savings bonds from your local bank. I am already nearly maxed out for this year already, and don’t think I’ll be buying any more.

New Series I Bonds Fixed Rate is… ZERO

Wow, harsh. No wonder they finally started to enforce the buying limits recently. Hope people bought what they could in April.

How To Buy Paper Series I Savings Bonds

While on my lunch break, I went over and bought some Series I Savings bonds, due to their high interest rates described here. Technically I had two more days until the 30th to get an April 2008 issue date, but I didn’t want to cut it too close in case there were any problems. I was also fueled by the news that interest rates will probably dropped yet again soon by Bernanke and Co.

Here’s how to do it:

1) Find a bank near you that sells paper savings bonds. Although the TreasuryDirect website says “any financial institution”, not all banks participate. I asked a few smaller ones near work and they did not carry them. The big boys like Bank of America, Washington Mutual, Chase, or Wachovia should all have them. If you don’t have one of these megabanks, just call the biggest banks in your region.

2) Either move funds into an account there, or bring cash. You can’t write a check from another institution, because they need to have the funds immediately. Although I didn’t try, a cashier’s check should work, assuming the bank can simply turn that into cash. I just had them withdraw the funds out of my bank account.

3) Ask for the Series I Savings bonds order form. Don’t be surprised if the teller looks confused, as this isn’t a popular request. Have them ask a supervisor, it should be Form 5374. I had one left over, so here is a scan of what it should look like:

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(Some larger banks may have an electronic process.)

Remember, the limit for paper bonds is $5,000 per Social Security number per year. So you can put down $5k for you and $5k for your spouse if you have one, and simply pay $10,000 by yourself. You may also wish to buy something like five $1,000 bonds instead of one $5,000 bond for ease of paper redemption.

The issue date of the savings bond will be the same day that the bank accepts payment. This date will be noted on the application, and the bank should also stamp it to confirm.

4) Wait. The forms says that processing will take 3 weeks, and then it will be mailed to you. You can have it sent to a P.O. Box if you have one, for more security. The processing time won’t affect your interest earned because again as long as you paid in April it will be stamped as issued in April 2008. Also, you can’t cash out until after 12 months, so there is no hurry.

How do I redeem them?
You can either convert these paper bonds to electronic format at TreasuryDirect and redeem online, or cash them in at the same place you bought them (or any other financial institution that sells them). The cool thing about electronic format is that you can do partial redemptions.

Series I Savings Bonds: Inflation Numbers Released, Time To Buy?

Well, the CPI-U that I recently questioned went up 0.9% in March alone. I guess you can’t hide everything. ;) So, is it time to buy some Series I bonds? First, refer back to this earlier post for a primer as well as some background information. You can ignore the predictions since we have the actual data now.

Calculating the Rates For Next 12 Months
If you buy by the end of April, the fixed rate portion of I-Bonds will be 1.2%. You will be guaranteed an variable interest rate of 3.08% for the next 6 months, for a total interest rate of 4.28%.

After that, the rate will adjust every 6 months based on the previous 6 month’s worth of inflation data. The next adjustment will be in May, based on September-March 2008 data. We can effectively predict this now using the prediction method explained here:

Sept 2007 CPI-U was 208.490. March 2008 CPI-U was 213.528. 213.528/208.490 = 1.02416, or a semi-annual increase of 2.416%.

Total rate = Unknown fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)

If we assume a fixed rate of the current 1.2%, we get
Total rate = 0.012 + (2 x .02416) + (.012 x .02416)
Total rate = 1.2% + 4.86%
Total rate = 6.06%

Possibly Good Short-Term Investment?
A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. Let’s say we buy at the end of April, hold for the minimum of one year, and pay the 3-month interest penalty for redeeming within 5 years. You’ll be able to sell on April 1, 2009 for an actual holding period of 11 months.

We will get 4.38% for 6 months, and ~6.06% for 3 months taking in account the penalty. Over 11 months, that’s equivalent to an annual rate of ~4.04%. Now, if you live in a state with 9% state income tax, your equivalent yield gets bumped up to ~4.44% depending on if you fully itemize your state income taxes.

This is a pretty competitive yield for an 11-month term on guaranteed cash, as long as you are okay with the lack of liquidity. In addition, you can always decide to hold it longer than 11 months if inflation continues to climb and the Fed is unwilling to raise interest rates due to economic recession. This could make your Series I bonds yield significantly more than similar bank CDs. If you hold for 5 years, then you don’t have to pay the 3-month interest penalty either.

Update: Also, if you hold it for 15 months (14 with buying early), you would get 4.28% for 6 months, 6.06% for 6 months, and then 0% (penalty) for 2 months. This would average out to about ~4.43% APY over that slightly longer period.

Very little downside with a good potential upside… just how I like it! I’m definitely buying some, I just have to figure out how much cash I am willing to lock up for 11 months.

The Catch
First of all, I just tried and unfortunately the TreasuryDirect website no longer allows purchases over $5,000. The official (and now enforced) purchase limit is $5,000 of paper I-bonds and $5,000 of online I-bonds per Social Security Number, per year. For a couple, that’s $20,000 total per year.

Second, you need to be quick and buy before the end of April to lock in these rates. I have a feeling in May the fixed rate will drop significantly. So if you haven’t already, open your account at TreasuryDirect soon. Their security has increased, I couldn’t even link up a new bank account online without mailing in paperwork. For paper bonds you should be able to buy these at any bank (not sure about credit unions).

Series I Savings Bonds: Inflation Protection + Decent Interest?

The Federal Reserve continues to slash short-term rates, so right now looks like a good time to take a second look at Series I Savings Bonds since they are not directly tied to such rates and also offer protection from inflation.

I-Bonds Quick Summary

  • Series I Savings Bonds (also known as I-Bonds) are investments that have very low risk (backed by the government) and offer to pay interest in two parts: a fixed rate + a variable rate indexed to inflation. The fixed rate is known when you buy, and the variable rate changes every 6 months.
  • You must hold them for at least 1 year. If you redeem within the first 5 years, you lose the last 3 month’s worth of interest. They stop paying interest after 30 years.
  • Interest from savings bonds are subject to federal income tax, but are exempt from local and state income taxes. For people that live in states with high income taxes, this can make them more attractive. They also have some special exemptions when used for educational purposes. See this Tax-equivalent Yield Calculator.
  • As of 2008, you can only buy $5,000 of paper I-bonds and $5,000 of online I-bonds per Social Security Number, per year. However, many users report still being able to buy up to $30,000 at a time online.
  • More info at TreasuryDirect.

Currents Rates and Predictions
Currently, the fixed rate portion of I-Bonds is 1.2%. If you buy a bond now, you will also be guaranteed an variable interest rate of 3.08% for the next 6 months, for a total interest rate of 4.28%.

After that, the rate will adjust every 6 months based on the previous 6 month’s worth of inflation data. The next adjustment will be in May, based on September-March 2008 data. Currently, we have September-February, so let’s use that to make an educated guess. Using the prediction method explained here:

Sept 2007 CPI-U was 208.490. Feb 2008 CPI-U was 211.693. 211.693/208.490 = 1.015363, or a semi-annual increase of 1.536%.

Total rate = Unknown fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)

If we assume a fixed rate of the current 1.2%, we get
Total rate = 0.012 + (2 x .015363) + (.012 x .015363)
Total rate = 1.2% + 3.09%
Total rate = 4.29%

Now, looking at oil prices, I’m guessing that inflation is probably going to tick upwards some more in March. If we use August-February data, the variable rate would be around 3.37% (total rate 4.57%). Either way, I think it is a fair bet that the variable portion will stay around 3.1% if not higher.

Buying I-Bonds as a 12-month CD
Given these predictions, we can have an idea of what our interest earned will be if we buy now. There is one last “trick” with I-Bonds, and it is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. Let’s say we buy at the end of March (this week!), hold for the minimum of one year, and pay the 3-month interest penalty. You’ll be able to sell on March 1, 2009 for an actual holding period of 11 months.

We will get 4.38% for 6 months, and ~4.3% for 3 months taking in account the penalty. That’s equivalent to an annual rate of 3.56%. Now, if you live in a state with 9% state income tax, your equivalent yield gets bumped up to 3.9-4.05% depending on if you fully itemize your state income taxes.

Given that you can also find a traditional bank CD that pays around 4% APY currently, this rate is competitive but not a screaming deal. But if you are in the market for some inflation protection and your time horizon is more like 2-7 years, there is low downside and good upside as you can always decide to hold it longer than 11 months if inflation continues to climb and the Fed is unwilling to raise interest rates due to economic recession. I am currently considering buying some of these to hold my emergency funds for this reason, but the lack of liquidity for the first 11 months is a concern.

Buying I-Bonds as a Long-Term Investment
If you want long-term inflation protection and are willing to stray from the ease and convenience of mutual funds or ETFs, I-Bonds might also be a good option. The fixed rate of 1.2% is relatively low historically, but in the current environment it’s actually very good. Other low-risk inflation-indexed products are trading at a negative real yield right now. The next update to the fixed rate will be in May. Given the current rush towards similar products, people are betting that the fixed rate is going to drop even further.

Predicting the New I-Bond Rates For November 2007

It’s now six months since April, which means it’s time again to partially predict the new I-Bond savings bond rates before the formal announcement until November 1st. Just in case we want to buy some beforehand and lock in some rates.

The CPI-U in March 2007 was 205.352.
The CPI-U in September 2007 was 208.490.

208.490/205.352 = 1.015281, or a semi-annual increase of 1.5281%.

Total rate = Unknown fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)

If we assume a fixed rate of the current 1.3%, we get

Total rate = 0.013 + (2 x .015281) + (.013 x .015281) = 1.3% + 3.08%
Total rate = 4.38%

Overall, if you buy now in October and lock in your 1.3% fixed rate, you?ll get 3.74% for 6 months and then 4.38% for another 6 months. Not very appealing. Here to hoping the fixed rate jumps some…

Predicting the New I-Bond Rates For May 2007

Just like last last April, using the newly released March CPU-I data and the information in my How To Predict I-Bond Savings Bond Rates post, we can now try to predict the upcoming I-Bond rate announcement on May 1st.

The CPI-U in September 2006 was 202.9.
The CPI-U in March 2007 was 205.352.

205.352/202.9 = 1.012085, or a semi-annual increase of 1.2085%.

Total rate = Unknown fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)

If we assume a fixed rate of the current 1.4%, we get

Total rate = 0.014 + (2 x .012085) + (.014 x .012085)
Total rate = 1.4% + 2.43%
Total rate = 3.83%

For those with existing I-Bonds, the variable rate is about 2.43% on top of your fixed rate. Note that the rate on your bonds changes every six months from the date you bought it, so it might not change immediately in May.

Overall, if you buy in April and lock in your 1.4% fixed rate, you’ll get 4.52% for 6 months and then 3.83% for another 6 months. If you wait until May, even if the fixed rate portion rises to 1.6%, the total rate will barely break 4%. Either way, as a short-term safe investment it’s not a very competitive rate. Unless there is a big jump in the fixed rate to make this an interesting long-term investment, I’ll see you in six months…

How Do You Account For Interest From Savings Bonds or Treasury Bills and Bonds On Your Tax Return Forms?

If you earned any interest from Treasury Bills or Savings Bonds last year, and are subject to local or state income taxes, be sure note it on your tax returns! Interest from federal debt obligations such as these are subject to federal tax, but not state or local income taxes. Here are some tips and examples to make sure you file correctly and get all the money that’s owed to you.

First of all, you have to manually go and print our your 1099-INT forms from TreasuryDirect.gov, if that’s how you bought or sold the securities. Go to Manage Direct > Manage My Taxes > Year. It’s not elegant, but at least they provide it… (You can also try calling 1-800-943-6864 to request one be sent to you.) On your federal return, there should be nothing specific to note as they are fully taxable at that level.

If you use online tax software for your state/local income taxes, look very carefully for a question that asks if you need to make any adjustments to your federal income numbers, or if you have any interest from government obligations or debt. If you go to an accountant and they don’t know how to do it – fire them ;)

To find out the applicable lines on the paper forms, first locate your appropriate state tax form in PDF format. It might be a good idea to start with the most general all-encompassing form. Then run a search in Adobe Acrobat for “bonds” or “subtractions” or “adjustments”. You are basically looking for the area where you make adjustments to the federal income figure. You may be referred to a supplemental form. Visually skim for keywords like government bonds, savings bonds, treasuries, or treasury bonds.

California Example

  1. I’ll start with Form 540 [pdf], the most general form.
  2. See per the Form 540 instructions that “If there are differences between your Federal and California income or deductions, complete Schedule CA (540) – California Adjustments
  3. Per the Schedule CA instructions: On line 8 enter in column B (Subtractions) any interest from U.S. Treasury bills, notes, and bonds (and also most U.S. Savings Bonds).
  4. Finish the schedule, transfer the appropriate value to line 14 of Form 540, and now your California taxable income should ignore any government debt interest.

Oregon Example

  1. I started with Form 40.
  2. In the “Subtractions” area, I see Line 16 – “Interest from U.S. government, such as Series EE, HH, and I bonds”. This is where I put in the interest from T-Bills as well.