Susan Tompor| Detroit Free Press
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Don't blink if you want to get a deal on I Bonds.
For months, we've heard that I Bonds bought now will have an annualized rate of 6.89% for the first six months after you buy the inflation-indexed U.S. savings bonds.
But I Bond rates will be shockingly lower if you wait to buy on May 1 or later, instead of rushing to buy I Bonds by April 27.
If you buy I Bonds issued in April, you'll lock in the attractive 6.89% that applies for six months after your purchase.
If you wait, you'll likely start out with an annualized rate of 3.79% for inflation-indexed bonds issued from May through October, according to Daniel Pederson, a Michigan-based savings bond expert and founder ofwww.BondHelper.com.
We won't know the exact rate until May 1 when the Treasury's Bureau of the Fiscal Service announces the new rates.
The estimates being suggested are based on the relevant inflation data that will be used as part of the Treasury's calculation.
What are I Bonds?
I Bonds combine an inflation-influenced rate that could change twice in a 12-month timeframe plus a fixed rate that applies to the 30-year life of the bond.
The 3.79% forecast is assuming that the Treasury keeps the fixed rate for new I Bonds at 0.4%, as it is now, Pederson said. He expects the fixed rate to hold at 0.4% or possibly tick a bit higher.
The Treasury has been known to occasionally tweak the fixed rate when new rates for the savings bonds are announced. But it's hard to know if the rate would stay the same, dip, or go higher.
I Bond rates: I Bond rates over time
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What is the current rate for I Bonds?
Waiting until May or June would cause you to lose out on the high rates that you can get through April 27.
Buying an I Bond before April 27 means you could end up with an annualized rate of around 5.34% for the first 12 months. With compounding it would inch up, closer to 5.39%.The actual rate could be higher or lower.
Remember that the 6.89% annualized rate on an I Bond, if you buy in April, isn't locked in for life. It applies to the first six months. Then, you'd end up with an estimated annualized rate of 3.79% for the next six months. After that, another rate kicks in based on inflation.
Interest is added monthly and compounded semiannually.
As I reported in an earlier column in March, April 27 is the last day someone can purchase an I Bond and have it issued by April 30, according to a spokesperson for the Treasury's Bureau of the Fiscal Service. This year, April 30 lands on a Sunday. Wait too long, and you're looking at a May issue date.
Why are I Bond rates heading lower?
Inflation is still very much with us but it has been growing at a slower pace and cooled down in March to the smallest 12-month increase since May 2021. Over the last 12 months through March, inflation rose 5%, according to the U.S. Bureau of Labor Statistics.
The consumer price index rose month-over-month by 0.1% in March, following a 0.4% jump in February, a 0.5% increase in January, a 0.1% increase in December, a 0.2% increase in November and 0.5% for October.
Why did I Bonds become popular?
I Bonds turned trendy as inflation heated up. But they're less likely to be popular going forward if inflation continues to cool.
Millions of savers rushed to buy I Bonds in the past few years as many banks and credit unions were slow to raise their interest rates on savings, and I Bonds offered some of the best rates available.
In 2021, savers invested about $5 billion in IBonds. That was huge, but nothing compared to 2022.
More than $32.3 billion in IBondswere sold via TreasuryDirect during 2022, according to the Treasury's data. Nearly $6.8 billion was bought in October alone.
I Bonds sizzled so much in October that the Treasury website couldn't handle the rush at times. That month, savers wanted to lock in an annualized rate of 9.62% for six months after thebondwas issued. Their goal was to buy before the new lower 6.89% rate kicked in from November 2022 through April.
This year, I Bonds remain attractive. Sales hit nearly $4.22 billion in January, the best January on record, according to the U.S. Treasury Department. So far in 2023 through March, I Bond sales reached slightly more than $6.6 billion.
Is an I Bond a good investment?
Going forward, savers will likely not be thrilled to see I Bond rates clock in a bit above 3.75% for bonds issued from May through November. They may turn to other financial vehicles instead.
Several online banks for instance are offering one-year certificates of deposit with annual percentage yields between 5% and 5.25%, said Ken Tumin, who foundedDepositAccountswhich is now part of LendingTree. The site tracks and compares bank rates.
Several brick-and-mortar banks and credit unions are also running promotional CDs with terms of around one year and rates above 4%.
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Tumin noted that some big banks – including Bank of America, Wells Fargo, Chase and Citi – are offering the select CD specials as many customers of the nation's largest financial institutions have been withdrawing money to chase higher interest rates offered elsewhere, including for money market funds and I Bonds.
Yet he warned that banks could pare back what they're offering, too. Ally Bank, he noted, lowered its 18-month CD rate being offered on April 14 from 5% to 4.80% annual percentage yield. "I have a feeling we may see other banks with similar moves in the coming weeks and months," Tumin said.
While I Bonds aren't necessarily a standout if you find a CD paying 5.25% or higher, they're still competitive and pay more than a typical savings account.
Additionally, the interest that your savings bonds earn is subject to federal income tax, but not state or local income tax. Interest on CDs isn't exempt from state or local taxes.
What is the downside of an I Bond?
But I Bonds do have some limitations. They can't be cashed at all in the first 12 months. And if you cash them before the five-year mark, you'd lose the most recent three months of interest. However, if inflation was super low, you'd lose a minimal amount of interest.
For example, assume you buy by April 27 and lock in the 6.89% rate for the first six months. Even if you cash the bonds in after one year and forfeit the last three months of interest, you would still net about 4.4% Pederson said.
Even if inflation is flat, I Bonds issued from November 2022 through April carry a 0.4% fixed rate, a rate that applies for the 30-year life of the bond.
Yet if we see negative inflation – known as deflation – for a time, the net return for a given six-month period could go below that fixed rate. Negative inflation occurred twice in 25 years. But the I Bond will never go below 0%.
How do I buy I Bonds?
An individual can buy up to $10,000 in I Bonds each calendar year. Savers can buy I Bonds for as little as $25 at TreasuryDirect.govand the bonds are held in an online account.
I Bonds and taxes: You can use your tax refund to buy I Bonds
In addition, savers are allowed to buy up to $5,000 in paper I Bonds each year directly if they're receiving atax refundwhen they file their returns. You fileForm 8888and complete Part 2 torequest that your tax refund be usedto buy paper bonds.
But if you're filing your tax return near the April 18 deadline, you're likely going to see I Bonds issued in or after May since it may take up to three weeks after the IRS authorizes the federal income tax refund for the I Bonds to be issued.
ContactSusan Tompor:stompor@freepress.com.Followher on Twitter@tompor. To subscribe, please go tofreep.com/specialoffer.
