- May 1, 2015, update: Series I Savings Bonds to pay 0.0% interest; EE Bonds bump up to 0.3%
The Treasury announced this week that it is dropping the fixed rate on Series I Savings Bonds to 0.0% for new bonds sold through April 30, 2015, and lowering the inflation-adjusted rate for all I Bonds to 1.48% for six months. Some investors might be wondering: Should I sell out and put my money elsewhere?
This is not the time to be selling your I Bonds. If you already own I Bonds, the new fixed rate of 0.0% doesn’t matter, because that applies only to new I Bonds purchased through April 30. I Bonds are unusual investments, with two interest rates combining into a ‘composite’ rate. So the composite rate varies from I Bond to I Bond, depending on when you purchased it.
- The fixed rate will never change. So if you bought an I Bond in 2014 with a fixed rate of 0.2%, it will continue to have a 0.2% fixed rate for the life of the bond. Purchases through April 30, 2015, will have a fixed rate of 0.0%. I Bonds I bought back in 2000 still carry a fixed rate of 3.4% and will continue to do so through 2030.
- The inflation-adjusted rate changes each six months to reflect the running rate of inflation. That rate is currently set at 1.48% annualized. It will adjust again on May 1, 2015, for all I Bonds, no matter when they were purchased. (Although the effective start date of the new interest rate can vary depending on the month you bought the I Bond, a Treasury oddity.)
So you need to consider:
- What is the fixed rate on your current holdings? If you have been buying I Bonds for many years, your fixed rates might range from 3.60% (May 2000) to 0.0% (November 2010, and often since). See a chart of the fixed-rate history. If you have I Bonds with a fixed rate of 1% or above, these are valuable assets and you want to hold them as long as possible, right up to maturity if you can. I Bonds with a 0.0% fixed rate might be tempting targets to sell, but not just yet.
- Why keep an I Bond with a 0.0% fixed rate? I am holding several of these, and I don’t plan to sell. The reason: The Treasury limits your purchases to $10,000 per person per year in TreasuryDirect, plus $5,000 in paper I Bonds in lieu of a tax refund. The goal in I Bond investing is to build a cache of inflation-protected money for use in the future. You can’t build your total when you are also selling.
- Why did you buy I Bonds in the first place? I Bonds are possibly the most conservative investment on Earth, because they hedge against inflation with 100% safety. Plus your holdings grow tax-deferred and aren’t taxed at the state level. They carry easy terms — you can sell after one year with a minor penalty and after five years with no penalty. For example, they could be used for 1) college savings, 2) a future down payment on a home, or 3) future retirement income. If you were saving for college or a home, and the time comes to sell, then you should sell. But if you were saving for future retirement income, now is not the time to sell, unless you need the money to meet current expenses.
- But I can get a 5-year bank CD paying 2.3%! Good point, and I think that’s a sensible investment. But I wouldn’t sell my tax-deferred I Bonds, which are growing at the rate of inflation (at least) to invest in bank CD, which is immediately taxable and carries no inflation protection. These are compatible investments, use them both.
I often point out that a lot of very wealthy people buy I Bonds up to the limit every year and scheme to get that $5,000 tax refund to bolster their holdings. Why do that do that? They are already rich, right? And that is the point. I Bonds are excellent investment for capital preservation, pushing money safely into the future.
When should you sell I Bonds? When you need the money — for college, a home, expenses in retirement, even for a trip around the world. But not to invest that money elsewhere.
In the future, if the I Bond fixed rate rises to something like 1%, I could see the point in selling bonds with a 0.0% fixed rate for the new issues. You’d trigger income taxes, but the investment would still make sense. Your holdings would remain stable that calendar year, but you could invest other money in TIPS to bolster you inflation-protected assets.
It seems someone has gone way out to complicate something that should be very simple!!!!
Roger, the composite rate paid by an I Bond is the fixed rate plus the variable rate. So a fixed rate of 1.60% or less will be wiped out by the -1.60% variable rate. The calculator is correct, those I Bonds will earn 0.0% for six months. Here is more on this:
I have Ibonds
05/2003==fixed rate of 1.10%
11/2004==fixed rate of 1.00%
05/2005==fixed rate of 1.20
The savings bond calculator states that I will be earning
0.00% as new rate for the next 6 months, or am i reading
it wrong when I do the redemption date calculation.
Should I not receive that fixed rate on these
bonds…as a minimum interest rate for the next 6 month period,
and for all 6 month periods for the 30 year life of the bond??
Please explain what interest rate I will be receiving on these
Mike, here is what I found from the Treasury site:
The Wizard must be updated every six months when new savings bond rates are announced. If it’s not updated, you’ll see “NA” in the rate column for bonds issued in May or November. Learn how to update the Wizard with the current earnings period values.
When the update is finished, change the “Price for” date of your inventory to (the current date). This will force the inventory to recalculate. Then select the “Price For Today” button to bring the inventory back to today’s date. The “NA” notation should be replaced with a valid rate.
Okay. Thank you. It’s amazing how I can search that Website and miss stuff. Just proves it doesn’t hurt to have a second pair of eyes. I need to slow down in my research. Thank you,.
Mike, I Bonds from 2002 and 2003 will continue earning interest until 2032 and 2033, so that isn’t the problem. I have some from different times in 2001 and they show a composite yield of 5.86% and 5.45%, using the Savings Bond Wizard. Where are you finding that NA? Fixed rates back in 2002 and 2003 ranged from 1.1% to 2%, depending on when you bought the I Bonds.
It’s the Savings Bond Wizard telling me that. It is N/A under rate, but yield is 4.12%. Previously, the rate was 3 and some odd percent. Now, its only showing N/A under rate. Yield is 4.12%.
If I have an I-Bonds from 2002 and 2003, and the current yield rate is NA while checking the value of my bonds, what does that mean? I think it means the government is no longer paying interest on the bond and I need to cash it in. Is this true? I waited for the new composite score but the NA is still applicable. What does that mean? Thank you.
Joseph, I am with you. If the fixed rate rises above 0.0% on May 1, I might be a buyer then. If it doesn’t, I will wait until Nov. 2 (Nov. 1 falls on a Sunday). If it still doesn’t rise, I’ll buy up to the limit on Nov. 2.
Great post, I am holding onto all of my Ibonds. I will buy my 2015 Ibonds after April 30, 2015.
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