- 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.