Meager rollover opportunity available
Monday, November 2nd, 2009
Categorized as: Series I US Savings Bonds
The new 0.3% fixed rate gives a meager opportunity to upgrade I bonds purchased between May and October 2008, which have a fixed rate of 0.0%, to get a better fixed rate.
Note that doing the rollover will earn only an extra $3 per $1,000 invested per year. For I bonds issued between June and October you’ll also gain a bit by limiting the number of months your bond investment earns 0% to less than six.
Combine that with the annual I bond investment limit of $5,000 paper and $5,000 electronic - yes, rollovers count against the investment limit - and the maximum benefit a single individual can get from a rollover is $30 year. But that is $900 over the 30-year life of an I bond.
If you’re going to do this, you should do it while your three-month interest penalty for redeeming before your bond’s 5th anniversary is zero. You’ll get that low penalty because your I bonds have been or are now earning a 0% rate.
If you want to do a rollover, I bonds issued in:
- May, June, July, and August 2008 can be rolled over without penalty in November 2009
- September 2008 can be rolled over without penalty in December 2009
- October 2008 can be rolled over without penalty in January 2010 - or, if you want the purchase of the new I bonds to go against your calendar year 2009 limit, you can rollover in December 2009 at the expense of a one-month interest penalty of $4.40 per $1,000.
Keep in mind you’ll also get a 1099-INT for the interest your I bonds earned between the time you bought them in 2008 and the time you cashed them in to purchase new ones. The tax on this interest will be less than the interest itself, so you’ll have a bit left over.
(Average rating: 4.00 stars)
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Tom Adams
Is there anything special I need to do to rollover a bond or do I just go to the bank and cash in the old ones and then buy new bonds? (I have paper bonds…so I might not be able to do a 1 for 1 rollover).
Tom: How do you feel how about purchasing I bonds in Dec and Jan based on the inflation results in Nov and Dec if the results are high and what would be acceptable to you. Thanks
Ray - That’s it. You cash the old one and buy a new one.
William - If you make your decision by comparing current I bond rates with previous I bond rates, then the current rates look terrible. On the other hand, those rates from the past aren’t available anymore. You have to compare the current I bond rates with other rates available to you today in the marketplace of investments. In that comparison, I bonds come out like they always do in real-time: not all that attractive, but without the warts of other investments. In the long view, I bond investors have done quite well compared to others.
Tom Adams
Please explain to me how a $10,000. “I†bond, purchased 04/2001,with a 3.4% fixed rate can have a 0% composite return for Oct 2009.
Jim - this I bond earns a composite of the 3.4% fixed rate plus the inflation rate. The inflation rate used in the calculation for this bond in the Oct 09-April 10 rate period is -5.56% (the annualized change in the Consumer Price Index between Sep 08 and Mar 09). So your rate should really be -2.16%, but the composite rate can’t go below zero. You are very lucky to have an I bond this large with a fixed rate this high. Don’t even think of cashing it in.
Tom Adams
Tom- in your reply to my inquiry on Nov 4th, 2009,you stated the following: (The inflation rate used in the calculation for this bond in the Oct 09-April 10 rate period is -5.56% (the annualized change in the Consumer Price Index between Sep 08 and Mar 09). So your rate should really be -2.16%, but the composite rate can’t go below zero).
However, when I go to TREASURYDIRECT and scroll down to the inflation table it shows a -2.78% for May 09, which I thought was for a period of six months. If that were the case shouldn’t I have earned the difference in the fixed rate of +3.4% and the inflation rate of -2.78% or +.62%? I am missing something. I do not understand where where the -5.56% came from. That rate is not shown in the table. Thanks for your help.
Jim Asher
Jim - The TreasuryDirect site gives the rates for six month terms, which is unlike anything you’ll find anywhere else in the investment universe.
On my site I give the rates as the more universal annual rates, then point out they they’re only good for six months.
The 3.4% fixed rate is an annual rate. So if you want to combine it with the -2.78% six-month rate from the Treasury site you’d have to cut it in half to make a six month rate - thus you’d have 1.7% minus 2.78% is less than zero.
5.56%, but the way, is just 2.78 x 2. So your point of confusion is mixing TreasuryDirect’s annual rates with its six month rates. I try to avoid that confusion here by never giving six-month rates.
Tom Adams
I currently holding I bonds that are not receiving interest. In your opinion, should I cash these in and repurchase at the current 3.36%?
Robert - you’ll be able to answer your own question after you understand how I bond interest rates work. It’s silly to invest money in something without understanding how it works.
Tom Adams