When Should You Redeem I Savings Bonds? A Calculator

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? Here how I try to figure it out, and a quick calculator that does it for you.

Should you redeem?
But first, let’s make sure you want to redeem. I-Bonds have several tax-advantages:

  • Interest is exempt from state and local income taxes (although so is T-Bill/T-Bond interest)

  • Interest can be tax-free for certain educational expenses
  • You can choose when to pay taxes on it with cash basis reporting (and thus possibly delay until when you are in a lower tax bracket)

In addition, if you have an older I-Bond with a high fixed rate portion, that baby may be a keeper regardless. For example, bonds issued in May 2000 have a fixed portion of 3.6%, which is a great guaranteed amount above CPI inflation. Right now, you’d be earning 3.6 + 3.12= 6.72%. I would keep any bonds with a fixed portion of 3% or higher, and probably get rid of any with fixed rates of 1.5% or below if I was treating the I-bonds as short-term cash holdings.

Yes, I want to redeem.
Okay, so when’s the best time to do so? First of all, your I-bonds must be 12 months old. Then, if the bonds are less than five years old, then there is a redemption penalty of the last three months of interest. This is where it can be a bit tricky. Since you lose the last 3 months interest, you’ll want to have that loss be during times where you earn the lowest interest, but you also don’t want to miss out for too long on great returns outside I-bonds if they exist. Fortunately, right now the numbers make it pretty easy. You’ll want to use your penalty on your 1.01% inflation months.

I’m going to use my own October 2005 I-Bonds as an example. The fixed rate on it is 1.2%. Here’s is an Excel spreadsheet showing possible redemption scenarios, with each month and the corresponding rate earned during that month.

altext

The rates of I-bonds change every six months from your issue date anniversary. So in October 2006 my I-bonds started earning only 1.2 + 1.01 = 2.21%, down from 6.91%. I estimated that the outside return I could get was about 5.25%, just as a general figure. Given all this, It’s clear that I want to fit my 3-month penalty during October to December 2006, and cash out the 1st day of January 2007. You want to cash out as early in the month as possible, as you don’t earn any more interest until the next 1st of the month.

Made sense? Kinda? Well, don’t worry, I won’t make you do any of this. I’ve made a super-easy calculator below that gives you an instant answer. All you need is the fixed rate and issue date of your I-type Savings Bond.

Quick Calculator

Fixed rate: % (Historical Rates)
Month of Issue:
 

From to you will earn %, and

From to you will earn %, and

For the six months after that, you’ll earn %

Given the current cash interest rates, if you’re not looking to hold for the long term, want to redeem, and have held for 12 months, you should cash out the 1st of

Notes

  • The calculator assumes that your I-Bonds are less than 5 years old and thus incur a 3-month penalty.

  • Results will only apply for the next six months or so. (If today is past April 2007, don’t use it!)
  • If you get an answer of ASAP, it means that you should probably cash out your I-Bonds as soon as possible, as the rates will not get better for the near future.
  • The calculator assumes that you want to cash out, please see “Should I Redeem?” section above.

Comments

  1. Great information for I bond investors, When should you buy?

  2. I would personally buy either if the fixed rate goes higher, like around 2% for a long term investment, or if the total combined rate makes for a good short term investhment.

    Right now, I wouldn’t buy any I-bonds. I need to learn more about TIPS to understand them better.

  3. Excellent calculator. I was trying to figure out when to sell my I-Bonds and your calc gave me the same month as what I figured out, it was much easier this way though. Thanks.

  4. Sweet. You must have read my request on the survey! Thanks!

  5. I’ve been investigating TIPS ETFs, but again, I need more research to see if they’re the way to go.

  6. It tells me to redeem ASAP at 50%, I think there is something wrong with the calculator.

  7. The calculator is already assuming that you want to redeem. There are various reasons that you’d want to keep the bonds, including tax advantages and a high fixed rate. Please see Should I Redeem? section here

  8. I’ve added a little warning for those trying to redeem Savings Bonds with fixed rates over 3% :)

  9. Great stuff Jonathan..Tax season is right around the corner…May need to bookmark this site..~rick

  10. Excellent,

    thanks for doing all the hard work for us.
    I’m in a similar situation with I-bond.

    bought mine in 2003.

  11. hi,

    thank you for your informative articles, especially about the ibonds rates. i also did the free ipod offer you mentioned recently…

    i tried your i bond redemption calculator.
    it did not take into account the fact that the
    i bonds are state tax free and therefore earn a higher equivalent yield, compared to a taxable investment.

    also since savings bonds can be tax deferred, they also earn interest on the tax otherwise paid if redeemed.

    i believe that as a result, i may be losing a fractional percentage in “yield to date” over present short term market rates, but i am gaining part of that back due to the
    2 issues listed above.

    for tax reasons it may to sell bonds in january, to provide an extra year of tax deferral, if yield from date of issue is close to present short term interest rate.

    thanks again,
    b

  12. Thank you for a great calculator. I use it each month and hope you update the numbers in April 2007.

  13. Very useful calculator. Would you consider an expanded version that includes the interplay of how many months you are from the five-year holding period and not having to pay the three-month penalty?

  14. How do you get the three months interest owed when the five years is up ? A double payment for each month of the last three months? or an extra three months payment all at once when the five years are up ?

  15. Mark Nelkin says:

    I was assured by Treasury Direct that the total which is on the website is the actual amount I will receive if I redeem. That means that I would lose the first three months interest rather than the last three months interest.

    This seems in direct contradiction to what they say elsewhere.

    Does anybody understand this unambiguously?

    PS to H Tate: I assume that the extra three months payment will be added all at once when the five years are up. I will know for one of mine in August 2008.

  16. THanks for this page — your calculator is quite useful
    (as opposed to the &%$#@! Treasury webpage).

    Update coming soon for the May07 rate adjustment?

Trackbacks

  1. [...] As suggested by my When Should You Redeem I Savings Bonds Calculator, I redeemed a $5,000 I-Bond purchased in October 2005 on Tuesday. I ended up receiving $298 in interest over a holding period of 14 months (I bought at the very end of October). Since the interest is exempt from state-income taxes, my effective interest rate was around 5.8%. I did it all online at TreasuryDirect.gov and the money was in my bank account within two days. [...]

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