5.61% CD or 6.73% I bond?
Thursday, April 6th, 2006
Categorized as: Yesterday's News (old post archive)
I have about $100,000 in CDs that mature later this week. A local bank has a 12-month CD special of 5.61% APY. I know the I bond rate is higher now, but I can't predict what inflation is going to do in the future. What would you do?
Tom's response
As long as the bank that is offering the CD is FDIC insured, I'd go with the CD and look at I bonds again next year. The 5.61% rate is well above the average rate banks are offering this week, which is 4.73% on a 1-year jumbo CD, according to Bankrate.com.
It's impossible to say exactly what the 1-year rate would be for an I bond if you bought it this week. But disregarding the tax benefits of Savings Bonds, the next inflation component would have to be 3.35% or more to make the I bond the better one-year investment, and an inflation component that high is very unlikely at this point.
Moreover, a year from now I bonds might have a better fixed-base rate than the 1% you'd get if you bought this week.
You also need to keep in mind that as of Jan 1, 2008 there's an annual investment limit of $5,000 in paper I bonds. You can invest an additional $5,000 per year in I bonds using an online account at TreasuryDirect. So it's not possible for a single individual to invest $100,000 in I bonds except by investing $10,000 a year over 10 years.
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Tom Adams
If you'd still like the state tax advantages you can also look into Treasury bills (for instance 6 month maturity). If you buy them through TreasuryDirect at auction and keep them to maturity there's no transaction fee. Make sure you read up on the auction process details if you're interested. They are exempt from state tax and most recently had a rate equivalent to 4.91% APY. However, they do not have a federal tax deferred nature like I bonds. But I completely agree with Tom to stick with a high yield CD etc. for now instead of I bonds. If you can wait until May 1, perhaps you can also look at I bonds with hopefully higher fixed rates.
it seems to me that it is just as likely the the fixed portion of i bond rate will fall as the combined rate is much more competative than cd rates; what do you think?