Saving Bonds Revisited – Rate Comparisons and Thoughts

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(Please also see the previous discussion of Savings Bonds)

The end of November has snuck up on me, and I’ve been putting off until now deciding whether to buy more I-Type Savings Bonds. I already did the math to see the rates for the worst case scenario (deflation), but that is pretty unlikely. The CPI-U, which is what the inflation component of I-Bonds is based on, only rose 0.2% in October. Instead of trying to predict inflation rates, let’s just see what the overall rate will be for different rates of inflation. I will compare rates for holding the I-Bond for 12 months and then redeeming them with the associated penalties, in order to compare it with a 1-Year Bank CD. I will also assume that you can buy at the end of the month to shorten the actual hold time to 11 months.

I-Bond Rate Comparison

For comparison, the best 1-Yr bank CD rates currently yield approximately 4.8% APY. Also, please note that interest from I-Bonds are exempt from state and local income taxes, so if you have you’ll have to use this equivalent after-tax equation.

So for my situation of 25% federal and 9% local marginal rates, any inflation above 1% will make I-Bonds a better buy when comparing it this way. If you don’t have state income taxes, you’ll have to get inflation rates above 3% to come out ahead. As usual, let me know if I screwed something up.

Hopefully this was helpful, I will probably buy some more myself. Remember, always buy at the end of the month, and the end of November is now!

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  1. Do you know if purchasing them today, the 29th would allow the bonds to have a november date on them? The treasury direct site pushes the purchase date to the next business day (the 30th) and I’m not sure if that will be cutting it a little too close. There is also a small disclaimer that says bonds will not be posted to your account for 1 business day, which means that they won’t post until Dec. 1st.

  2. Could you add another table with hypothetical tax situations (perhaps two extremes and an “average” State tax with average income)? I might be getting carried away, but it would be nice to have side by side javascript calculators where you enter in all the variables and see how the numbers match up. I’ve done the calculations in excel but I’m sure I made some mistakes.

  3. I bet the inflation will be around 1% at best.

  4. Don’t have time atm to get into details, but it doesn’t look right to me when the rate of return in both six months is >= 6% (last two lines), but annual ROI is

  5. If the ‘purchase date’ is in Nov, it will be dated in Nov from all that I’ve read. So the 29th would probably be the very last day in November to buy with a date in Nov. Again, be sure the purchase date is 11/30 or earlier. Or you could wait until the end of December.

    Javascript may happen when school is over =)

    All returns are annualized.

  6. Just a newbe question, where do I start buying
    my first I Bond ?.

    Or you can go to a bank

  8. There is an article posted to BestCashCow describing the I-Bond and how it might compare to a CD.


  9. I just converted about a 100 paper I and EE bonds, thanks to your post on how to convert them. It is a lot more convinient to hold them , check the interest earned and redeem them.

  10. Hi,
    Just discovered this great site! I’ve been looking at I Bonds for over a month now. The sticker I’m having is not being able to place the electronic type into a trust. With a “Co-owner” there is always the remote danger of an accident that might claim both. Because there is no provision for adding a beneficiary to the Co-owners – what happens next?

  11. Bill,

    Your post is over a month old, but just in case you happen to come back and still need an answer about adding a beneficiary…

    If you’re buying paper I-Bonds, all you’ve got to do is tell the bank representative (or whoever you’re buying them from) to add someone as a beneficiary. (Actually, they’re supposed to ask you)

    If you’re buying electronic I-Bonds, you’ve got to set up a “registration” that includes a beneficiary. The good news is you can then make that particular registration your default, so you won’t have to conciously adjust that setting every time you buy a security at Treasury Direct. Here’s what you do:
    1. Log in to you T.D. account
    2. Click on Account Info
    3. Click on Registration List (at the bottom)
    4. Click on Add Registration
    5. At the top, select the “Beneficiary” type of registration
    6. Fill out the form
    7. Check the box at the bottom for “Make this my preferred registration.”
    8. Click submit

    Good luck!

  12. Benjamin says

    Hi everyone,

    This post sequence for savings bonds looks a bit dated but I wanted to get a read on predicted interest rate for the next six months starting in May of 2006. I understand it will be fixed rate plus CPI but I’m not much for doing equations. Any ideas on the new general rate with CPI assuming fixed stays at 1%? Also just a note of advantage that maybe hasn’t been mentioned -> Savings Bonds defer tax payment until they are cashed for up to 30 years. Now more than likely, you’ll “have” to cash due to better rates somewhere else like I did recently with my EE bonds only earning 3.6%. But until then taxation is delayed and you get to earn on those earnings. Good deal for the I-bonds I bought back in 2002 at 2% fixed now earning 7.76%!

  13. Around mid-April, we will have a brief period where again we can accurately predict the upcoming inflation portion of the I-bond rate, and be able to decide whether to buy in April or wait until May. Please check back in then!

  14. For the period of May 1 to October 31, the I bonds rate will be 2.41%. With this, the fixed rate is 1.4% and the variable is 1% as this was the inflation rate between Sept 2005 through March 2006.

    Time to get out of this savings vehicle once your 6-month lock in expires (6.73%).

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