Inflation is stubbornly sticking around but a super high rate on new I Bonds will go away in roughly a month.
If you're thinking about buying inflation-indexed U.S. savings bonds, you want to buy before April 28. By buying before then, you'd start out with an annualized rate of 6.89% that would apply for six months after your purchase. The starting rate applies for I Bonds issued by the Treasury Department from Nov. 1, 2022, through April 30. Since April 30 is a Sunday, you'd need to buy earlier.
"April 27 is the last day someone can purchase an I Bond and have them issued by April 30," according to a spokesperson for the Treasury's Bureau of the Fiscal Service.
"Purchases made on April 27 will be issued on April 28. Any I Bond purchases made in TreasuryDirect from April 28 through April 30 will be issued with a date of May 1."
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. Inflation can go up and down and you'd still get that 0.4% plus an inflation rate. The fixed rate is a pretty good deal, given that I Bonds that were issued earlier often had a 0% fixed rate.
Currently, an inflation-influenced annualized rate of 6.48% is added on top of that fixed rate. Then, that's how you'd get to the much-talked-about annualized rate of6.89%. Buy now, you lock in that rate for six months. Buy later, it's gone.
If you buy I Bonds from May 1 through October, you'd receive a new yet, unpublished — but no doubt much lower — rate for the first six months. And we don't know if the new fixed rate would be 0%, 0.4% or maybe even higher, which is a possibility.
A cautionary point: If we saw negative inflation — known as deflation — for a time, it’s possible that the net return for a six-month period could go below that fixed rate. Bottom line: The I Bond will never go below 0% but it can go below the current 0.4% fixed rate during periods of deflation.It’s an unusual twist, though.
Daniel Pederson, a Michigan-based savings bond expert and founder ofwww.BondHelper.com, noted that negative inflation took place twice in 25 years of I Bond history — or two times out of 50 published rates for a six-month period that began in May 2009 and then in May 2015.
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Odds are really good that we're not going to be excited about inflation-adjustments being made for I Bonds beginning in May, he said.
Pederson offered a couple of scenarios.
Let's assume for simplicity's sake that the fixed rate would continue to be 0.4% for I Bonds issued from May through October. Again, we don't know that for certain because Treasury can change the fixed rates when they make a new announcement on May 1.
If the fixed rate stays at 0.4%, Pederson said, I Bonds issued from May through October might be paying 3.9% if inflation held the same in March as it did in February. March inflation data is to be reported at 8:30 a.m. April 12. It's the last number needed to determine the inflation adjustment for I Bonds ahead.
Another scenario: What happens if inflation in March really heated up? Then, Pederson estimated, maybe you'd look at an annualized rate for six months of 4.7%.
Or if inflation really cooled down this month, you might be looking at an annualized rate of 3.1% for six months.
Hot or cold, interest rates in a general range of around 3% to 4.5% aren't thrilling especially at a time when banks and credit unions have been paying 4% to 5% on some promotional one-year certificates of deposit.
If you want fast cash, I Bonds are no longer buzzworthy.
Someone who is interested in a short-term gain could likely find the same or even better rate in some one-year certificates of deposit that currently are hitting as high as 5% to 5.35%, said Ken Tumin, who foundedDepositAccountsin 2009, which is now part of LendingTree. The site tracks and compares bank rates.
By contrast, Tumin said someone who is interested in building long term savings might want to buy an I Bond before May to lock in that current fixed rate of 0.4%.
"It is possible that the I Bond fixed rate could rise in May," he said, "so it does make sense to hedge your bets by buying half of your annual I Bond purchase before May and the other half after April."
Buying before the end of April also makes sense to lock in the 6.89% annualized rate for the next six months. Then, you'd get a lower inflation rate for the following six months afterward.
If you combine an annualized rate of 6.89% for the first six months with an estimated annualized rate of 3% or 4% for the next six months, well, then you might lock in an annualized rate of around 5% or 5.5% for the first 12 months of the I Bond. The actual rate could be higher or lower.
The limitations: I Bonds cannot be cashed at all in the first 12 months. If you cash them before the five-year mark, you'd lose the most recent three months of interest. If inflation were super-low, you'd lose a minimal amount of interest.
The upside: I Bonds provide a conservative spot for savings, and will adjust in the future should inflation heat up again. Inflation adjustments are made on your I Bonds every six months as long as you hold them, based on the month they were issued.
Someone who is saving for a down payment on a home in a few years might opt for I Bonds. Or even a family saving some money for college.
Retirees or those nearing retirement who have some savings on the side, Pederson said, might want to still buy I Bonds because they'd have some flexibility in deciding when they want to cash in those bonds. Maybe they'd tap into that savings if they want to delay claiming Social Security benefits before their full retirement age or taking money out a 401(k) or other retirement savings plan. People born in 1960 or later are looking at a full retirement age of 67. (If you were born on Jan. 1, you’d refer to the previous year.)
Full retirement is the age at which you can claim 100% of the benefit that Social Security calculates from your lifetime earnings record.
The interest earned on I Bonds is taxed at the federal level, not the state and local level, when you cash the bonds. You don't need to report anything on a tax return until you cash that savings bond. You could opt to choose to report each year's earnings or wait to report all the earnings on your taxes when you get the money for the bond.
Savers rushed into I Bonds in 2022, as inflation heated up. But an individual can only set aside up to $10,000 in I Bonds each year.
If you didn't buy any I Bonds yet in 2023, you could set aside $10,000 this year. You'd do so via the Treasury's website: TreasuryDirect.gov and the bonds are held in an online account.
In addition, savers are allowed to buy up to $5,000 in paper I Bonds directly if they're receiving a tax refund when they file their 2022 tax returns. You fileForm 8888with your tax return and complete Part 2 torequest that your tax refund be usedto buy paper bonds.
The $5,000 limit relating to tax refunds is on top of the annual $10,000 limit per individual. Theoretically, a single person could buy up to $15,000 in I Bonds in a year if they had a sizable federal refund due. A married couple could buy up to $25,000 in a single year this way.
But here's a warning to late tax filers: It may take up to three weeks after the IRS authorizes the federal income tax refund with Bureau of the Fiscal Service for the I Bonds to be issued.
The issue date for paper bonds will be the first day of the month that the IRS submits payment for the bonds to Treasury Retail Securities Services in Minneapolis, according to TreasuryDirect.gov. If Minneapolis receives your order from the IRS on March 18, the issue date of your savings bonds will be March 1.
Given the delays in the system, you don't want to wait until the last minute, file a federal income tax return on April 18 to meet the tax deadline and then expect to have savings bonds issued by the end of April. It might have a May issue date or later if you wait too long.
ContactSusan Tompor:stompor@freepress.com.Follow her on Twitter@tompor. To subscribe, please go tofreep.com/specialoffer.
