A Simple Guide to Series I Savings Bonds (I-Bonds)

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After the recent interest rate cuts by the Federal Reserve many of my bank and money market interest rates plummeted.? Now the best yield I have is on my Series I Savings Bonds issued by the United States Treasury.? These bonds are also known as I-Bonds and their yields fluctuate according to inflation.? Currently, the yield is 4.28% and that beats all of my other cash investments.? Here is some information on the interest rate on I-Bonds and the advantages of owning these bonds.

The yield on I-Bonds changes every May 1st and November 1st.? The composite interest rate is based on a fixed rate and a variable portion that fluctuates with the semiannual inflation rate.? The formula used for the yield is:

[Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

The fixed rate is currently 1.20%, but it is expected to drop on May 1st.? However, the inflation rate has gone up so the variable rate will be higher than before. If you lock into the current fix rate, it is expected that the next composite rate would be above 6%.

You have to hold an I-Bond for a year before you can cash out, and if you cash in your I-Bonds before five years you will lose 3 months of interest. However you can take advantage of the bond's interest accrual rules to lose only 1 month of interest. It is a bond that gives you the whole month's interest no matter which day you purchase or sell it.? As an example, you can buy the bond on April 30th this year and sell it on May 1st next year.? Your holding time is one year, and you are supposed to lose three months of interest, but you actually only lose one month and two days' interest because you actually held the bonds for only one day in the two months you performed the transactions.? If you choose not to sell the bonds they will continue to earn interest for 30 years.

There are several advantages to owning I-Bonds.? First, taxes on these bonds are deferred so you can choose to pay them only when you sell them.? Second, local and income taxes are not charged on all Treasury Bonds so in a high tax state like California the effective yield is even higher.? Third, you can reasonably predict what the next interest rate would be according to the CPI reports.? Finally, it is a relatively safe investment because it is backed by the United States Treasury.

Currently you can only buy $5000 of I-Bonds online per year through http://treasurydirect.gov, but you can also buy $5000 of paper notes through a bank.? There should be no transaction fees to buy I-Bonds and as long as the US Government does not fail completely you are guaranteed to get your money back.? The current I-Bonds yield is definitely better than any CD or savings account out there, but if you make a purchase make sure you do not mind leaving your money with the government for at least a year.

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