U.S. Savings Bonds: I-Bonds and EE-Bonds – Good investment? (Part 1)

Right now, my portfolio is very cash heavy (almost 50k), as I saving for up a house in crazy-prices land. Accordingly, I am always on the looking for liquid investments that are safe and pay competitive interest rates. So I’m taking another look at U.S. Savings Bonds.

Let?s start with the two types of Savings Bonds that are available: EE and I Bonds. I’ll start with characteristics that are the same for both types, and then focus on I-bonds, leaving EE bonds for a later post.

Common to all bonds:

- Backed by the U.S. Government, about as safe as you can get. You will never lose money on a savings bond (ignoring inflation).
- No commissions or fees when selling or buying, start with as little as $25.
- You can buy them online, through most banks, or via payroll deduction.
- You can get them either in paper or electronic form (Paper form not available online.)
- Must hold them for 1 year (well, technically a little over 11 months, more on that later)
- Earns interest for 30 years or until cashed in.
- You won?t pay state or local income taxes ever on the interest. This can be a big different for high tax areas.
- Federal tax on the interest is deferred until you redeem them. This saves paperwork and allows the interest to compound.
- If you use the bonds for college, the interest could be totally exempt. Restrictions apply.

Both I- and EE- Bonds start earning interest from the first day on their issue month, and interest is earned monthly. Which means, if you buy the bond on January 31st, you still will earn interest from January 1st. Nice! Therefore, the minimum you must hold the bond is actually a little more than 11 months, since if you can redeem the bond bought on 1/31/05 on 1/1/06. However, if you redeem the bonds within 5 years, you also face a penalty of the interest paid in the last 3 months.

I-Bond specifics:

I-Bonds are sold at face value – a ‘$50 I-Bond’ costs $50. They earn an interest rate that is the sum of two parts:
- A fixed part that is ?locked in? for the life of the bond when you buy it
- A variable part that changes every six months based on rates announced on 5/1 and 11/1 of each year, designed to track inflation.

If you bought an I-Bond today, you would get a fixed rate of 1.0% (the lowest ever so far) and a variable rate currently at 2.67%. Historical rates and the exact formula can be found here (http://www.publicdebt.treas.gov/sav/sbirate2.htm). The rate changes again on May 1st. Note that there are people that own older I-Bonds with a fixed rate of 3.4%. That means they today they are earning 6.07% on their money ? I wish I had a piece of that!

Because the fixed part of the I-Bond rate is currently so low, many experts recommend that people investing for the long haul go with EE-Bonds, as historically they have paid interest rates an average of 2% above inflation. Recently however, due to the extraordinarily low Fed rates, I-Bonds have had better returns than EE-Bonds.

As for me, I bought $5,000 worth of I-Bonds back in 2003 when you were allowed to buy them with a credit card. This let me earn cash-back on a rewards credit card while buying the bonds. Sadly, this is no longer an options. My fixed rate is 1.1%, 0.1% higher than currently available, so currently I am earning 3.77% on it. Even with the 3-month penalty, that?s still better than keeping it in ING for the same time period if I redeemed now. Even now, Emigrant Direct is only offering 3.25%, and I still have to pay state and local taxes on the interest. Hmm? Next time, I?ll put down some details on EE bonds, and decide whether I should buy any more of either type.

Comments

  1. Thank you for this info- I will check back on the EE bonds. You explained this very clearly.

  2. Nice post…and timely. I was just starting to wonder about these about a week ago! Looking forward to the EE info.

  3. Part 2 is here. Looks like i’m going to “wait and see”.

  4. Live Long and Prosper! Good luck with your financial goals–thanks for the nice site–you are doing better in these matters than I am so far!

  5. I am still confused about how i bond interest compounds. The site says semiannually…does that mean twice a year? So if I have a $50 bond earning $2.50 a month, I have $59 at the end of 6 months and I begin earning $2.95/mo for the next 6 months?

    Or does it compound differently? I’m so used to monthly compounding via online savings banks, I’m sort of vexed.

  6. The interest accrues on the first day of the month, and is compounded semiannually. The math in your example doesn’t look right, but I think you have the right idea. If you had $50 earning 10% interest, you’d be earning the 10% annualized on the $50 for first 6 months and then 10% on $50.25 for the next 6 months.

    Just like most bank-related compounding frequency problems, it doesn’t make too much of a difference until you get to relatively high amounts.

  7. If I bought I bonds 3 years ago at say 3%. Will they be paid the current interest rate I believe is 6.7%?

  8. What is the date that you bought it at? There are lots of calculators at savingsbonds.gov, but if you tell me the date I can also look it up. You might even be doing better than 6.7%.

  9. Why would anyone in their right mind invest in a low yeild long-term vehicle (penalties apply of redeemed within 5 years) to save for a down payment? Makes no sense.

  10. Well, you read the whole series, you would have seen that, even with the 3-month penalty, the interest earned on a savings bond was higher than any other cash-equivalent at the time. Currently, that is no longer the case.

  11. My brother says I am nuts for buying EE bonds. I have a good savings in a money market account earning 5%. I have a great 401 K retirement fund going. I have been buying bonds for 3 years now, one aweek. Am I nuts or does it make some sense to keep some of my money guarenteed.

    Troy

  12. I am interested in a good money market account. I am now in a online saving account with a 3.50% saving and I think I can do and get a better rate with a money market or a IRS account. Who has the best money market account and is it better to put your money in a IRA, Money market account or a CD or just leave it in a high yield savings account I want to get the most for my money HELP!!!!!!!

  13. This is a horrible place to put your money invest in gold and silver!

  14. I bonds are a great ideal for investing and saving for full security of your dough,, take a 50 or a hundred and invest every time you get some cash in the bonds ,, and all of a sudden .. you have dough,, and a great savings plan.. and boy will it add up in time ,, yep…start today ,,, and you will have some dough… and thats the name of that tune….

  15. seems that if susan boyle is worried about her money ,, then she should invest in some I bonds in the USA.. it is a good investment for her and safe… all the nickel and dimers start saving and putting away your cash for you will need it, when, as gerald celente says, the big depression is coming,,, now my predictions are different ,, I believe that around oct 15th to the 30th the banks will start to make loans to small businesses and homeowners to start the cash flow.. we shall see who is right … so start your portfolio and buy some I bonds today ,,, money that you won’t blow on garbage and it is safe,,, thats the name of that tune

Trackbacks

  1. [...] As predicted in October, the new inflation portion of I-Bonds is 3.12% and the new fixed rate is 1.4%, for a total of 4.52%. This is still lower than what is available via Treasury Bills and online savings accounts, so those of us with older Savings Bonds should really think about cashing them in. But when is the best time to do it? [...]

  2. [...] about cashing them in. But when is the best time to do it? Here how I try to figure it out, and a quick calculator that does it foryou. [...]

  3. [...] those that are unfamiliar with I-Bonds or just need a refresher, please check out my old post U.S. Savings Bonds: I-Bonds and EE-Bonds – Good investment?. Keep in mind that it was written 6 months ago, so “current” and “today” [...]

Speak Your Mind

*