Savings I Bonds September 2011 Update: 3.06% For Next 6 Months

New inflation numbers are out for September 2011, so it’s time for the usual semi-annual update.

New Inflation Rate. March 2011 CPI-U was 223.467. September 2011 CPI-U was 226.889, for a semi-annual increase of 1.53%. (CPI-U increased 3.9% over last 12 months.) Using the official formula, the variable interest rate for the next 6 months will be approximately 3.06%, depending on the upcoming fixed rate announcement.

Purchase and Redemption Timing Tips. You can’t redeem savings bonds until after 12 months, and any redemptions within 5 years incur a interest penalty of the last 3 months of interest. 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. It’s best to give yourself a little buffer time though, since if you wait too long your effective purchase date may be bumped into the next month.

Buying in October. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0.0%. You will be guaranteed an variable interest rate of 4.60% for the next 6 months, for a total rate of 0 + 4.60% = 4.60%. For the 6 months after that, the total rate will be 0.0 + 3.06 = 3.06%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy at the end of October 2011 and sell at the beginning of October 2012, you’ll earn a 3.34% annualized return for an 11-month holding period, although you may want to hold it longer as new interest rates are announced. This is much better than any 1-year FDIC-insured bank CD available right now, keeping in mind the liquidity and purchase limits.

Buying in November. If you wait until November 1st, you will get a new unknown fixed rate + ~3.06% for the first 6 months, and an unknown rate based on ongoing inflation after that. Based on the current market rates of Treasury Inflation-Protected Securities (TIPS), in my opinion it is very likely that the new fixed rate will remain zero. A lot of uncertainty with this route.

Existing I-Bonds? If you have an existing I-Bond, the rates reset every 6 months (depending on your purchase month). Your monthly rate = your specific fixed rate + variable rate. Even at a low fixed rate, your existing savings bonds are paying much more than current savings accounts, so be very sure if you wish to redeem them.

Beware Low Purchase Limits. The annual purchase limit is $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number for 2011. For a couple, that’s a $20,000 total cap per year. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number

Buy online at TreasuryDirect.gov. As for paper, here is a post on how to buy paper savings bonds from your local bank. Paper bonds will be ended in 2012, except through a small window by overpaying your taxes on purpose.

With the interest rate calculations above, we find that savings bonds still pay much more interest than equivalent bank CDs with the same low risk. Also, interest on savings bonds is not subject to state income taxes as well as other unique tax advantages. I’m buying up to our limits and keeping all of my existing bonds for the foreseeable future. For more background, please see the rest of my posts on savings bonds.

Comments

  1. Thanks for the reminder of the I-bonds. I’ve been wondering where to dump some money and CDs are so low.

  2. Unfortunately this advice may be a bit late for those of us new to the site. They use physical confirmation still for new accounts until next month, so it’s likely you won’t be able to buy a bond before the interest lowers.

  3. So is the rate 4.6% for the six month period beginning Nov 2011 if the bond is purchased by Oct 31?

  4. Cabron James says:

    “Paper bonds will be ended in 2012, except through a small window by overpaying your taxes on purpose.”

    Jonathan, can you do a how-to post explaining how to buy additional paper I-bonds?

    Is there a limit to how much paper I-bonds you can purchase via overpaying taxes? Is this limit $5K? Thus, if you had a Federal tax refund of $5100, the Treasury would give you a $5K I-bond & a $100 check?

    Is there a way to keep the overpaying to the year-end Q4, this way you are minimizing the time you are earning 0 interest on these “overpayments”. In an extreme case, say have your employer withhold your entire paycheck in Dec & maybe Nov or Oct? Then in January, switch back your withholding to the “regular” amount?

    I would imagine self-employed people will have an easier time setting up this “overpayment” scheme, than an employee trying to convince a possibly anti-free-thinking, work-averse HR drone.

    Would like to hear your thoughts on this topic

  5. Alexandria says:

    “I would imagine self-employed people will have an easier time setting up this “overpayment” scheme, than an employee trying to convince a possibly anti-free-thinking, work-averse HR drone.”

    You don’t have to be self-employed to send in estimated taxes (to over-pay your taxes for this purpose). Look up IRS form 1040-ES. Fill out your name, social security, #, address, etc., and send in payment with the form. In fact, I would just go the estimate route rather than hassle with withholding/payroll.

    You can mail in an estimate January 15th (for 4th quarter of prior year) and file your taxes ASAP afterwards.

  6. @David: So is the rate 4.6% for the six month period beginning Nov 2011 if the bond is purchased by Oct 31?

    If it’s purchased by Oct 31, you get the 4.6% for all of the month of October (Nov 1 credits the entire previous months interest).

    @dev, you can still purchase paper I bonds if you haven’t maxed out (or if you have family members that haven’t maxed out).

  7. @Paul, technically can, yes, but it’s certainly much less convenient than electronic.

  8. Paper purchase is pretty easy if you have a bank that does it. Its a one page form which Jonathan has a prior post on (4/28/2008). Paper bond comes in mail in about 3 wks (bond is “bought” on the day/month you do the bank transaction, not paper arrival). Its a $5k max whether via this form or tax refund.

    You can certainly withhold more $$ in paycheck to reach that max for tax refund approach but keep in mind what your payroll change cycles are.

    I have done the “SmartExchange” as well to convert paper to electronic. I mailed it regular post (crossed fingers; had photocopy of orig though). They set up a separate sub account to your main Treasury Direct account for this. Was recorded within 3 wks as well.

    With CDs as low as they are, buying both forms is worth the effort. If you believe inflation is going up (already is…), this is as good as any to have some hedge, albeit a small amount.

  9. Even if you can’t buy in October, buying in November will still pay more than any 1-year bank CD, with just the 3.06% interest for 6 months and nothing after that. (I also doubt inflation will be zero for the next 6 months.) I’d definitely open the TreasuryDirect account now, so you can at least buy your limit for 2011.

  10. Just got this email from Treasury Direct yesterday: “In a few weeks, we’ll be replacing the access card with personalized images, one time passcodes, and computer registration as new layers of security to your TreasuryDirect account. Continue to use your access card until you’re notified within your TreasuryDirect account.”

    I guess this is good. That code card(access card) was a PITA.

  11. @David – Yes, if you buy in October, then you’ll get the 4.6% for six months with an October dated bond. Paul has the details right.

    @Cabron – I have a paper bond via bank link in my original post, and I think Alexandria answered your other question. You just need to make sure you have a tax refund equal to how much in bonds you want to buy. 1040-ES makes it easy to overpay.

  12. @MAC – I got the same e-mail. After reading that I was actually a bit scared that the new security options will be even worse, though, ha.

  13. Is there any penalty for overpaying too much (during the year) when filing your tax return (in Form 1040 Line 77)?

  14. Cabron James says:

    thx Alexandria & Jonathan.

    I still am not sure if there is a limit to overpayment. Is it $5K? Some other amount over $5K but not unlimited, like $10K?

    So if your Federal Tax Refund was $5100, & you asked to have your refund be in paper I-Bonds, will your refund be
    a $5000 paper I-Bond & a $100 check from the Treasury
    or
    a $5100 paper I-Bond

  15. Jonathan (or someone else),
    Can I buy a $5K Paper I Savings Bond with my SS with my wife as a co-owner and also another $5K Paper I Bond with her SS with me as co-owner?

    If so, can I then convert both to electronic format having the co-ownership?

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