US Savings I-Bonds - Every 6 Months (May 1 & Nov 1)

[Admin/YBB]

US Savings I-Bonds have the current rate that is a combination of base/fixed rate and recent semiannual inflation rate (CPI-U, unadjusted; March-September-March). Rates change on May 1 & November 1 and remain valid for the next 6 months. The personal limit is $10K (additional $5K is possible via tax refund). Buyer cannot cash I-Bonds within 12 months; there is 3-month interest penalty if cashed within 5 years (so, 5-year CDs are a fair comparison). The tax can be deferred until redeemed (that is the preferred option; pay as you go is possible but is complicated). They stop earning interest in 30 years. They are not tradable like TIPS. The I-Bonds are better than the EE-Bonds now (EE-bonds lock in the low rate at the issue, but are guaranteed to double in 20 years + 1 day). Account must be opened at Treasury Direct.

Formula: Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
Explanation: Let b be the base/fixed rate (annual), f the semiannual inflation rate (so, annualized inflation is 2f), then use 6-month compounding and ignore squared-terms (so, the formula used by the Treasury is an approximation).
Composite rate = (1 + b/2 + f)^2 - 1 = 1 + 0.25 x b^2 + f^2 + b + 2f + b x f - 1
Ignoring squared terms,
Composite rate = b + 2f + bf

I-Bond Rates  treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
I-Bonds FAQs
   treasurydirect.gov/savings-bonds/i-bonds/
   treasurydirect.gov/help-center/savings-bond-faqs/
More
   TD FAQs  treasurydirect.gov/indiv/help/treasurydirect-help/faq/
   TD User Guide  treasurydirect.gov/indiv/help/treasurydirect-help/user-guide/
   TD Help  treasurydirect.gov/indiv/help/treasurydirect-help/
   TD Laws & Regulations  treasurydirect.gov/laws-and-regulations/savings-bond-regulations/
CPI-U, unadjusted  fred.stlouisfed.org/graph/?g=NW7x
BLS Inflation Calculator  www.bls.gov/data/inflation_calculator.htm

Combined Rate (Annualized) Valid for Next 6 Months

11/1/21  7.12%

[hondo]

YBB: I have never really looked into I-Bonds until now. With CD and bond interest rates so low, the I-Bond appears to be a great replacement for CDs and bond funds at this time.

I realize that the interest rate is adjustable, they can't be redeemed for 12 months and, like CDs,there is a 3 month penalty for the first 5 years. Other than that, are there any other downsides to the I-Bond? If not, I am surprised that there hasn't been more written about them on the investment forums that I read.

Your appraisal of I-Bonds would be very much appreciated.

[Admin/YBB]

There is no downside. There is a limit of only $10K/15K per person per year, rates will change on May 1 & you cannot have IRAs at Treasury Direct (it is not a sophisticated consumer site). Rate changed only on Nov 1 from 3.5%+ (good) to 7.12% (great) due to high CPI-U and it will take some time for the mainstream media to pickup on it. I saw NYT piece on it today. BUT I have brought attention to this at various sites that I post on & most posters have been surprised.

[Admin/YBB]

The Finance Buff on almost all you may want to know about buying I-Bonds at Treasury Direct.
thefinancebuff.com/how-to-buy-i-bonds.html

[hondo]

Thank you very much YBB.

[anitya]

Series I Savings Bonds Rates & Terms: Calculating Interest Rates

treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/

"An I bond earns interest monthly from the first day of the month in the issue date."

So, is it correct that if you buy IBonds on Nov 29, you earn interest for the whole month of Nov?

[Admin/YBB]

anitya, yes, the Savings Bond interest is credited as of the 1st of the month regardless of when the Savings Bond is purchased or sold during the month. So, one should buy towards the end of the month and sell on/after the 1st of the month to guarantee 2 extra months of interest.

Moreover, the accrued interest is posted only on the 6 monthly dates from the purchase date. So, wait to cash Savings Bonds on such 6 monthly dates so as not to lose any accrued interest.

As you can see, in the worst case, the holders can lose almost 8 months of interest by not being familiar with the rules. That may not matter much if the Savings Bond is held to 30-yr maturity, but can make a big difference for shorter holding periods.

[anitya]

Nov 6, 2021 16:56:54 GMT -6 Admin/YBB said:

anitya , yes, the Savings Bond interest is credited as of the 1st of the month regardless of when the Savings Bond is purchased or sold during the month. So, one should buy towards the end of the month and sell on/after the 1st of the month to guarantee 2 extra months of interest.

Moreover, the accrued interest is posted only on the 6 monthly dates from the purchase date. So, wait to cash Savings Bonds on such 6 monthly dates so as not to lose any accrued interest.

As you can see, in the worst case, the holders can lose almost 8 months of interest by not being familiar with the rules. That may not matter much if the Savings Bond is held to 30-yr maturity, but can make a big difference for shorter holding periods.

www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ifaq.htm#added

When are earnings added to the I bond?

"I bonds increase in value on the first day of each month .  . . ", 

Makes me think one can not receive an extra month of interest upon redemption.  If any thing, it seems like one might lose a day or two of interest upon redemption, assuming one redeems after the 5 year period.   If I redeem on 29th of a month, I do not think I will earn interest for that month.  So, best to redeem on the 1st/2nd of the month.  I do not see how one can lose 8 months of interest.

[chahta]

So using the I bond could be similar to an TIRA. If held for 30 years no tax is paid? Curious if tax law stays the same, can they be given to heirs with a step up?

For an income stream from them it seems they should be held for 5 years then sell some for income. Also seems they could be thought of as ballast too. Thanks.

[Admin/YBB]

anitya , I think buying early in the month and selling late in the month (reverse of the recommendation) could lose/forgo up to 2 months of interest. 

Also, if the accrued interest is added only at 6 month intervals, what happens to that if one cashes out in between? I haven't found a clear statement on this. Please post here if such a statement is found.

chahta , no step-up as that applies to stocks and properties, but not to bonds. Note that Savings Bond account balance/value goes up due to interest credits (fixed/variable). Although the default is to defer paying taxes, one could opt for paying taxes annually (e.g. Bonds purchased for kids who have no income at all for several years. But I think that one is then locked into that option, so if taxes are paid annually, that is then for 30 years).

As for cashing them for income, buy smaller denominations (smallest $25, largest $1,000), so that appropriate amounts can be cashed; for example, there is no provision for partially cashing $1,000 Bond (that will go up in value beyond $1,000).

[anitya]

"I bonds increase in value on the first day of each month . . . " is clear that any redemption after 5 years will let us have interest (accrued) through the previous month of redemption.  [Bold added]   Otherwise Treasury would have told us, just as they disclosed penalties and other restrictions.

Confirmed here - treasurydirect.gov/indiv/tools/sbrt1221.pdf

and here - treasurydirect.gov/BC/SBCPrice

[Admin/YBB]

"[Chuck Jaffe to adult daughter] ...my advice was I bonds.

“More savings bonds,” she said. “Really?”

Yup, really."

www.seattletimes.com/business/its-time-to-reconsider-savings-bonds-old-and-new/

richmond.com/business/your-funds-it-s-time-to-reconsider-savings-bonds-old-and-new/article_148be23a-98ad-5228-8be2-2c0e220600ff.html

[Same articles in various syndicated papers in case one doesn't open]

[anitya]

I have ibonds in my Treasury Direct account that would mature in another 10-15 years. I did not consider buying anymore (notwithstanding the current high inflation rate), given only $10K is allowed now and I will not be around to see it mature. I suppose I could cash it along with my legacy ibonds. I was also apprehensive if the Govt would allow inflation / interest rates to run away, given at $30T Treasury debt Govt probably is already paying at least $300 billion per year of interest at current interest rates.

Very interesting that I was able to buy now with a transaction date of Monday (the next business day). The $10K limit is per calendar year. One can target to buy another $10K in January 2022.

Does anybody know how many days after transaction date Treasury Direct has been drawing money from the bank account? I guess on Monday I will have to walk a check to the bank that is linked to my Treasury Direct account.

[Admin/YBB]

Electronic debits are fast these days. So, the draw from the linked bank may be Monday night, or Tuesday at the latest. Be aware that if deposit a check, there may be a hold. A quicker way may be doing some offsetting transaction within Treasury Direct.

Frustratingly, my Signature Guarantee hold for opening a new Treasury Direct account still remains. It is almost 4 weeks and I have called them and sent e-mail. But I am told that I just have to wait my turn for paperwork processing. I think that in the time it took someone there to handle my call (that was long as the Rep basically verified on phone much of the info in my application) and e-mail, the hold could have been removed instead.

[anitya]

Yogi,

I think you will get interest from the month when Treasury received your application - notwithstanding when they processed it.

If you do not mind, please share why you decided to invest for the first time in IBonds now? As I mentioned, I am ambivalent even though I already have an account there and it took me only 10 seconds to initiate a buy. You obviously had to expend a lot more effort and must have a well thought out reason for buying.  Pl feel free to send me a PM and I will edit this post.  Thanks.

[Admin/YBB]

I had EE Bonds when they were good but they matured - and the EE Bonds are bad now. I had 10-yr TIPS when there were good (base rates 3.25%+) but they matured too. These were with the old paper system & I never opened a Treasury Direct account. So, now I-Bonds are good but I am running into these signup issues. If something looks good, I go for it. 

[anitya]

Thanks. I will just follow you into it - the opportunity cost is low and the amounts are small. My crystal ball says a lot depends on the path of Covid which I can not project. I am not good at predictions anyway. Given that we are buying now, it reasons to believe we should buy again in January. Agree?

[anitya]

The question of when Treasury Direct draws money from our linked bank account for a new buy is answered this morning. My buy date is today but I placed the request Saturday night. Money was withdrawn from my bank account at 5:13 AM PST this morning. That is pretty much as soon as the banking hours began.  Placing a future buy request appears to cause a withdrawal from the linked bank first thing on the purchase date.

[anitya]

Here is an email correspondence with Treasury Direct re the day of ownership (for purposes of earning interest).

My Q: Is the day of purchase and the day of redemption of an Ibond considered the day ownership? For example, if an ibond bought more than 10 years ago were to be redeemed on the first day of a month, until when does interest accrue on that bond? Similarly, if one were to buy an ibond on January 31, 2022, would the bond accrue interest for the month of January 2022? Thank you.

Treasury Direct reply: You would go by the Security Issued date that is shown under your History tab then Security History. You do not go by the date you requested the purchase. There is generally 2-3 days difference from the date you request a purchase to the date the security is issued. This is to allow time for it to go through to your bank account on file to ensure the funds are there.

Generally, the best time to redeem a savings bond is at the same time it increases in value. Because all savings bonds increase in value on the first day of the month in which the interest is due to accrue, you may cash the bond(s) anytime during the month to receive that month’s interest payment. The interest on savings bonds is calculated by month, not by day.  [Italics and blue font added]

Series I bonds earn interest monthly, and the interest is compounded semiannually.

_________________________________________________

I checked the History in my Treasury Direct account this AM. The IBond purchased yesterday (see earlier posts) already is included in there with a issue date of 11.01.2021.

The highlighted text in their reply appears to imply that one gets the interest for the entire month of redemption.  I sent a reply for clarification and will post there reply here.

[Admin/YBB]

Thanks for verifying this from Treasury Direct. 

It is also behind the general recommendation mentioned earlier in this thread to buy Savings bonds late in the month but cash them early in the month.