Hold off on Series I bond rollovers
Tuesday, May 2nd, 2006
Categorized as: Yesterday's News (old post archive)
I have Series I bonds purchased in May 2003, Nov 2004, and Oct 2005. I don’t need this money for at least five years. Does the new 1.40% fixed base-rate make it worthwhile to cash my Series I bonds and buy new ones?
Tom’s response
My advice is to hold off on any rollovers until next October. I have two reasons.
The first is that since only bonds less than five years old are worth rolling over (the older ones all have base rates of 3.00% or more), you’ll pay a penalty of your most recent three months interest when you redeem the I bonds you have now. You want that penalty to be three months of low interest, not three months of high interest.
Because of the way Savings Bond rate periods work, some I bonds just started earning the high inflation rate announced last November. You want to savor that high rate to the last drop, then wait through another three months of low rates to give up as the early-withdrawal penalty. If you were going to do a rollover, this table shows the earliest date you should act:
Don’t roll over I bonds before these dates! |
|||
| Issue month | Don’t rollover before | ||
| Jan or Jul | Oct 2006 | ||
| Feb or Aug | Nov 2006 | ||
| Mar or Sep | Dec 2006 | ||
| Apr or Oct | Jan 2007 | ||
| May or Nov | Aug 2006 | ||
| Jun or Dec | Sep 2006 | ||
The second reason is that interest rates may continue to rise. By October we should have some idea whether the base rate announced next November could be even higher than 1.40%. If it is, you’ll be sorry you hurried to switch.
Some I bond investors also need to remember that I bonds have maximum annual purchase limits. Rolling bonds over could limit your ability to make new investments.
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Tom Adams
You refer to a “rollover.” Is there a way to roll the money directly from a 1% base I bond to one paying 1.4% and avoid a tax event? I assume I would redeem the 1% bond and use the proceeds to purchase a 1.4% bond. The interest from the sale would be taxable. True? Thank you.
Terry - Sorry I didn’t make this clear to begin with. In this case “rollover” is shorthand for redemption and repurchase, which does create a taxable event.
Direct rollovers from one Savings Bond into another aren’t available at this time, although they were in the past (E or EE rollovers to H or HH).
I might add that you may not want to do an immediate redemption and repurchase.
For example, to escape getting paid the meager 1% inflation component more for than 3 months, it may be strategic to cash May and Nov I-bonds on Aug 1, put the proceeds in a high-yield savings acct or cd, and then buy new I-Bonds in late Oct or late Nov depending on the Oct inflation figure.
Sorry, Tom, but there is no way to avoid earning the low current rate for 6 months. A bond purchased, for example, in August will continue to earn its initial rate for 6 months even after there is a new rate posted on November 1. The bond purchased in August will start earning the new rate February 1.
John - yes, your understanding of when rates apply is correct and most people don’t get this.
However, if you want to redeem an I bond before five years and have the three penalty-months be low-rate months, this article explains how to do it.
The only situation in which this can’t be done is if your I bond was purchased in Nov 2005 or later. In that case, there’s no way to avoid earning the low rate for six months.
The original question, however, asked about I bonds purchased before Nov 2005.
Have a question about the chart. I understand reasons for redeeming I-Bonds after 15 months but please explain why I-Bonds should be redeemed on/after the 6th/7th day of a month? Aren’t I-Bonds eligible for redeeming on date of issue?Thanks.
Faye - those are years in the chart, not days. I just edited the original post to make this clear.
Thought I understood the chart but have another question on redeeming I-Bonds purchased on June 1, 2004 and June 7, 2005. Chart shows to redeem in September but will I lose September’s interest? Should I redeem 1st of October? Thanks.
Faye - since your bonds are less than five years old, you’ll lose the most recent three months of interest if you redeem them.
If you redeem in September, you’ll lose the interest for June-July-Aug, when your bonds were paying a relatively low interest rate (2.01% for the June 04 I bonds, and 2.21% for the June 05 I bonds.)
You can redeem in October instead, if you like, but the hidden assumption here is that the reason you’re redeeming the bonds at all is because you want a higher interest rate. If that’s the case, you should redeem in September.
Your other option is to hold on and see what your I bonds will pay in their next 6-month rate period. At the moment it looks like it will be another eyepopper.
Thanks Tom. Of course, don’t know why I got confused about that date. After reading your response, I may redeem the June 2005 bonds in September and hold the June 2004 bonds for the next 6-month rate. If rate is attractive, I’ll buy new bonds to get the higher base rate. Faye
Tom, it is decision time on redeeming my I-Bonds. What does the next 6-month rate period look like to you? Thanks. Faye
Faye - Right now we only have four of the six months of CPI data needed to determine the next rate. You can follow this and see where we are right now in my monthly inflation update.
Tom, using a bond calculators - I find that I have consistent interest rates except for the months of May and November. For instance, my bonds for 9/05, 10/05 show interest rate of 2.21 - the bond for 11/05 is 4.12 - then the one for 12/05 is 3.2 - the one for 01/06 is back down to 2.01. I guess my question is - why aren’t the interest rates the same over a six month spread of bonds?
Tim - As of now, November 2006, here’s where your bonds are:
09/05 - 1.2% base - 3rd month of 1.00% inflation
10/05 - 1.2% base - 2nd month of 1.00% inflation
11/05 - 1.0% base - 1st month of 3.10% inflation
12/05 - 1.0% base - 6th month of 1.00% inflation
01/06 - 1.0% base - 5th month of 1.00% inflation
These agree with what you’ve calculated except for the 12/05 bond. For that one, you’ve picked up an error somewhere. That bond is paying the 2.01% rate this month.
The composite rate is always a tiny bit more than just adding together the base and inflation rates because the Treasury’s actual calculation also adjusts the base rate for inflation.