Should I roll over my November 2005 I bonds?

Monday, October 16th, 2006
Categorized as: Yesterday's News (old post archive)

I invested in Series I Savings Bonds in November 2005 with a fixed rate of 1.0%. If the fixed rate in November 2006 is higher, should I sell these bonds and purchase the higher fixed rate I bonds? If so, how much higher should the fixed rate be?

Tom’s response

One of the interesting things about I bonds is that the Treasury is committed to paying you interest for 30 years, but you only have to guarantee that you’ll hold the bond for one year. This creates the opportunity you’re interested in – rolling your investment over into bonds that pay a higher interest rate.

What you lose when you do a rollover is your last three months of interest. In this specific case, that doesn’t amount to much, because the rate your I bonds are earning now is just 2.01%. Three months interest at that rate is about $5 per $1,000 of investment.

What you gain when you do a rollover is the higher base rate. Because your bonds aren’t a year old yet, you can’t roll them over until November 1. If the base rate for new bonds purchased after November 1 doesn’t change from the current 1.4%, the additional 0.4% of interest would earn you $4 per $1,000 of investment per year.

In this case, you’d make the $5 penalty back in a little over a year.

Of course, we don’t yet know what the fixed-base rate will be on the November 2006 I bonds, although it currently appears unlikely that it will be more than 1.4% or less than 1.0%. Update: As of Nov 1 we know it’s 1.4%.

If the base rate is 1.4%, then it makes sense to roll your bonds over in November. Update: Several readers have pointed out that I forgot to mention that you’ll lose tax-deferral if you do a roll over. I bonds with low base-rates are all so recent I don’t think this will be a huge deal, but if you’re in a high tax bracket it’s another thing to consider.

But if the new base rate is 1.1%, it would take five years to earn back the $5 early-withdrawal penalty. In that case it would be tempting to wait for a better base rate before rolling over the bonds.

When doing roll overs, keep in mind that Savings Bonds have maximum annual purchase limits. Roll overs count against that limit.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

6 Comments

On October 16th, 2006 Ken said:

I guess you also have to consider taxes during a roll over. Is that correct?

If you cash them in before 5 years, would Treasury send you a 1099 with interest minus the 3-month penalty? Or would the penalty be listed separately?

On October 17th, 2006 Tom Adams said:

Ken – that’s right; when you do a rollover like this, you have to include the interest your old bonds have earned in your income. The interest shown on the 1099-INT is what you actually receive.

For example, the 1099 for 11/05 bonds rolled over in 11/06 would just show nine months of interest, not separate entries for twelve months of interest minus the penalty amount.

On October 19th, 2006 paul said:

Is there a place where you can see the % interest you are earning based on the month you bought the bond as well as which 3 months interst you are giving up if you redeem before 5 years.

For example, for I bonds bought October 2005, If I want to cash in November. The interst in Novemeber is 2.21%. However, if I cash out. I would lose September, October, & November’s interst? or August, September & October? not sure which one is correct, and have those rates listed, so you know which interest rates you are giving up.

On October 23rd, 2006 Tom Adams said:

Paul – if you cash in November, you lose August, September, and October.

I believe the information you’re looking for is in this article from May 2.

On November 1st, 2006 Pieter said:

I buy bonds like smokers buy cigarettes, but recently I stopped buying I bonds and started buying ee bonds. When should I go back to I bonds?

On November 1st, 2006 Tom Adams said:

Pieter – My opinion is that you shouldn’t have switched, but since you did, now would be a good time to go back to I bonds.

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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