New series "I" savings bond rate effective 11-1-23

[kathyc2]

3.6%, but that was a LONG time ago, in 2000.

I figured the fixed rate is related to Fed rate. It does, but quite loosely. Interesting that in early 2000's the fixed rate was higher than fed rate.



Since 2000 the combined rate is almost always higher than Fed rate, which is generally the most you can get on bank products.

[kathyc2]

I also purchased in 2022 with knowledge that I might want to take the 3-month penalty at some point to trade up to a better rate. However, if the inflation component goes back up, then the sacrifice will be more than $90, correct? It's always the last 3 months of interest earned that is forfeited, I assume.

Correct that the foregone interest is the last three months. I think people get held up too much on the word "penalty". The money needs to sit 3 months at no interest, similar to if a person had the money sitting in a checking account. Using Duke's example he earned $912 over 18 months. Disregarding compounding I calculate that he made an annual rate of around 6%. Doubtful that he could have had that return on any other no risk investment during that point in time.

I only do CD's at my CU. They may not have the absolute highest rate, but they are competitive. I can take out a new one online. They auto renew, but it's not generally at the best rate. After it matures, I just call and have them put the amount in my checking account. I never have to go into the branch.

My MM account is at American Funds. Again, all online for transactions.

[TaxGuyBill]

I wonder what the highest amount of fixed rate has ever been.

3.6%, but that was a LONG time ago, in 2000.

https://treasurydirect.gov/files/savings-bonds/i-bond-rate-chart.pdf

[Rapid Robert]

"Another 42 months at zero fixed rate to "earn" $90? If you take out the 10K from the current 0 fixed, and reinvest with the current 1.3% fixed you will be ahead of the game in 6-7 months."

I also purchased in 2022 with knowledge that I might want to take the 3-month penalty at some point to trade up to a better rate. However, if the inflation component goes back up, then the sacrifice will be more than $90, correct? It's always the last 3 months of interest earned that is forfeited, I assume.

I wonder what the highest amount of fixed rate has ever been. Is it worth waiting for more than 1.3% possibly in the next year or two?

I'm not worried about the $10K annual limit, as I probably will just keep on maintaining or rolling over into other i-bonds, not putting in any new money. This is part of cash emergency fund, not sure if that should be considered short term or long term investment.

I am paying fed tax on interest every year, because I don't want a multi-thousand dollar "surprise" income hit all in one year (after 5 or 10 years of holding), and I do keep very good records. :-)

Lastly, although perhaps irrational, I hate the experience of opening and renewing CDs at banks so much that I'll gladly forgo a little interest to no longer have to deal with that. If you want to switch banks for a better rate, that is a pain, and the new bank almost always wants you to open other accounts with them (checking, savings, credit card), and even when renewing with the same bank, you have to go in and watch as the glorified teller spends 10-15 minutes doing who knows what on their computer for what should be a 90-second transaction (or even something you can do yourself online). My spouse has a >$10K CD at Wells Fargo and I don't go with her any more to renew, because last time I went, I asked what the current CD rates were, and the employee started telling me that he couldn't reveal that super secret info without first collecting all my personal info. When I said that made no sense, he immediately stated he had to go get a manager and could no longer work with us.

[kathyc2]

If I remember right you can elect to have the interest income taxable as you earn it, by doing so in the first year or you can take all the interest at the end when it matures or you cash it in? Correct?

Correct, but I'd say most would not want to. 1099INT will be issued for year of redemption, so you would need to keep very good records.

Interest is tax free for state income tax. If criteria is met, the interest may also be exempt for federal if used for education.

You could have it be similar to an annuity by putting in for a number of years and then only taking a portion out each year. Same concept of deferring tax on earnings without all the restrictions of an actual annuity.

Another anomaly is you are credited a full month interest for the purchase month whether you put it in on the 1st of month or toward the end of the month.

[FEDUKE404]

I'm not following your reasoning. Another 42 months at zero fixed rate to "earn" $90? If you take out the 10K from the current 0 fixed, and reinvest with the current 1.3% fixed you will be ahead of the game in 6-7 months.

The money I had put in was part of my ear marked short term money, and I calculated the 3 months forgone interest from the start. At the time it was significantly more than I could get with bank products. The 1.3% isn't enough to entice me to put more in, but if it goes over 2%, I might put more in from what I have designated as long term money.

Thanks for the "big picture" perspective.
If I exit my current I-bonds, I probably will just move whatever comes out into some T-bills or T-notes. At least I WOULD know what I'm getting down the road(s).
More control on my part, and I'm getting kinda old.

[JON]

If I remember right you can elect to have the interest income taxable as you earn it, by doing so in the first year or you can take all the interest at the end when it matures or you cash it in? Correct?

[kathyc2]

Thanks for the superb number-crunching!
I will probably just hold on for five years, and then likely exit.
Or I might exit earlier, take a three-month penalty, and dump the funds into some Treasury bills.

(Unless I am missing something, at this time I can not rationalize the purchase of any new I-bonds.)

I'm not following your reasoning. Another 42 months at zero fixed rate to "earn" $90? If you take out the 10K from the current 0 fixed, and reinvest with the current 1.3% fixed you will be ahead of the game in 6-7 months.

The money I had put in was part of my ear marked short term money, and I calculated the 3 months forgone interest from the start. At the time it was significantly more than I could get with bank products. The 1.3% isn't enough to entice me to put more in, but if it goes over 2%, I might put more in from what I have designated as long term money.

[FEDUKE404]

You bought when fixed was 0 and inflation component was 9.62%

For the period May-Oct 2022 you earned 80.17 per month. (10,000 x .0962/12) Six months totaled 481 which was added to principal.

From Nov 22 to April 2023 you earned 56.60 per month as the rate was 6.48%. (10,481 x .0648/12). Six months was 340 which was added to the principal.

From May 2023 to Oct 2023 it will earn 30.78 per month with rate at 3.38% (10,821 x .0338/12). Three months at 30.78 plus the 10,821 is the 10,912.

The amount they show is the amount you would receive if cashing out. Held less than 5 years has a penalty of 3 months interest. That is why they are only showing you earned 3 months interest in the last renewal.

Thanks for the superb number-crunching!
I will probably just hold on for five years, and then likely exit.
Or I might exit earlier, take a three-month penalty, and dump the funds into some Treasury bills.

(Unless I am missing something, at this time I can not rationalize the purchase of any new I-bonds.)

[kathyc2]

I have a Treasury Direct account, so I can monitor the activity of the $10k (all I own of that type) bonds. As of today, the stated value of my I-bonds is $10,912.00 . I will let someone with more smarts than me do the math to see what has gone on.
.

You bought when fixed was 0 and inflation component was 9.62%

For the period May-Oct 2022 you earned 80.17 per month. (10,000 x .0962/12) Six months totaled 481 which was added to principal.

From Nov 22 to April 2023 you earned 56.60 per month as the rate was 6.48%. (10,481 x .0648/12). Six months was 340 which was added to the principal.

From May 2023 to Oct 2023 it will earn 30.78 per month with rate at 3.38% (10,821 x .0338/12). Three months at 30.78 plus the 10,821 is the 10,912.

The amount they show is the amount you would receive if cashing out. Held less than 5 years has a penalty of 3 months interest. That is why they are only showing you earned 3 months interest in the last renewal.

[FEDUKE404]

Thanks to all for clearing up my confusion.
In May of 2022 I purchased $10k (annual maximum) I-bonds when the total rate was somewhere north of 8% and all of the talking heads on the business programs were proclaiming the merits of the I-bonds.
On the next six-month offering cycle, the total rates were far less, and they remain so today.
I have a Treasury Direct account, so I can monitor the activity of the $10k (all I own of that type) bonds. As of today, the stated value of my I-bonds is $10,912.00 . I will let someone with more smarts than me do the math to see what has gone on.
As noted by others, you are essentially purchasing a 30-year bond (POD registration is an option), and the $10k annual purchase limit is another factor to consider.
I've been flipping funds in Treasury bills, with limited purchases of 2-year Treasury notes, and I can continue to receive around 5.5% APY interest. The trick is to know when to hedge toward the longer length purchases.

[RWG1950]

In my reply to FEDUKE, the I-bond renewal example I used was a July 2016 purchase date with no fixed component.
The 6 mo. July renewal rate on this bond would be whatever the CPI-U was when the 6 mo. rate was posted by the Treasury in May of the year.
(Not likely to be the current 3.97%)

[kathyc2]

Risk averse savers may find the current new money fixed rate of 1.30% above the inflation rate (as measured by the CPI-U) to be attractive.

Not bad for people looking for a long term investment. The 3 month penalty if not held for 5 years and the 10K annual limit work against the attractiveness currently for me.

I put 10K in Nov 2021 and pulled it out in Sept 2023. Even with the 3 months foregone interest, I earned 1,240 over the 22 months. That worked out to roughly a 6.5% annual rate. Currently I can get 4.98% on MM with no guarantee how long that rate will last or lock into a 7 to 17 month CD at my CU for 4.8% to 5.4%. So there are currently better options for people looking more short term than long term and not being limited to 10K a year.

I still have 2 more 5K I-bonds at 0 fixed rate. I calculate that if I cash them out and reinvest at the 1.3% fixed, I'd break even in 5 months with the 3 month penalty. However, I believe that would then me my 10K "limit" for the year.

[RWG1950]

In response to FEDUKE'S reply post, the rates for I-bonds posted by the Treasury each Nov & May apply only to new money purchases made during that six month period.
Older I-bonds that renew during each new money rate period will receive the same new money inflation rate but will continue to have the same fixed rate (if any) that they
started with when they originally bought their bond. The fixed rate stays the same - for up to 30 years - only the inflation adjusted rate changes.
An older I-bond, bought on July 15, 2016 (for example) that had no fixed rate at issue would "renew" in July for the current new money inflation rate for the next 6 mo. period at 3.97%.
Risk averse savers may find the current new money fixed rate of 1.30% above the inflation rate (as measured by the CPI-U) to be attractive.

[kathyc2]

I'm saying the 5.27% is only applicable for new bonds.

The fixed rate remains constant. So, if a bond was purchased when the fixed component was zero, they will be receiving 3.97% the next time their they receive a new rate instead of the 5.27%.