One more quick savings bond update… the official rate for new I Savings Bond was announced and the variable rate is indeed 1.18% but the fixed rate was a surprise at 0.20%. It’s still very small, but the last time we got a rate slightly above inflation was May 2010.
This means that if you buy a I Savings Bond from November 2013 to April 2014, you will earn 0.20% + a variable rate based on inflation updated every 6 months. The first six month variable rate is 1.18%, so your total rate for the first six months is 1.38%.
Short-term CD replacement? If you wanted to use this bond like a short-term CD, at the very minimum you would be guaranteed 6 months at 1.38% and then 0% after that. If you assume you buy at the end of November and hold for 11 months to maximize interest, with the 3-month early withdrawal penalty your effect annual rate would be approximately 0.75%. That’s not a bad floor considering that the minimum scenario would only occur if we had mild negative inflation (deflation).
Purchase limits. The annual purchase limit per calendar year is $10,000 in I-bonds via TreasuryDirect online (per calendar year), and also $5,000 in paper bonds purchased with IRS tax refunds (per tax return). For a couple filing as married filing jointly, that’s $25,000 per year.
EE Bonds. Series EE bonds issued from November 2013 through April 2014 will earn the newly announced rate of 0.10%. All Series EE bonds issued since May 2005 earn a fixed rate in the first 20 years after issue. At 20 years, the bonds will be worth at least two times their purchase price. This means *if* you hold the bond for 20 years, you would earn an effective 3.5% annualized rate.
A couple of readers have asked me about my opinions on this feature. First, 3.5% is only slightly higher than what a 20-year Treasury bond is currently paying (3.4% today). While the savings bond does offer potential tax advantages, I’m just not really interested in what is basically a 20-year CD with a huge early withdrawal penalty as otherwise you’re just earning 0.10% for 19 years. 20 years is a really long time and there may be many temptations to cash it in early. If it was 10% for 20 years, maybe, but not 3.5%.