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Understanding I-Bonds

E-mail|Link Posted by Andrew Chan June 3, 2009 10:00 AM

I purchased I-Savings Bonds in 2001 and 2002 at around 6.35 percent and 7 percent, I believe. Are the bonds still paying that or are they now at 0 percent?

I-Bonds are U.S. Savings bonds that incorporate inflation protection into the rate that is earned on the bond. The rate earned on an I-Bond is comprised of two separate components – a fixed interest rate component and an inflation rate component. This composite rate is updated in May and November of each year and applies to newly purchased I-Bonds during that period as well as to outstanding I-bonds at the time of the rate change.

For example, if you purchased an I-Bond on June 1, 2001, you would start to accrue interest on the bond at the rate of 5.92 percent – which was the composite rate in effect at that time. In November 2001, the composite rate was updated to 4.4 percent to reflect the new fixed rate and the then-current inflation rate. For the six months starting on November 1, 2001, you would accrue interest at the 4.4 percent rate. On May 1, 2002, the composite rate would be updated again and that would be the rate that you would earn for the next six month period. This continues until you redeem your bond.

As of May 1, 2009, the composite rate on the I-Bond was 0 percent. This rate dropped from 5.6 percent in November 2008 to 0 percent in May 2009 because the inflation rate component, as measured by Consumer Price Index for Urban Consumers (CPI-U) for March, was a negative 2.78 percent (-2.78 percent) and the fixed rate was 0.10 percent. While the combination of these two rates (from a mathematical standpoint) would result in a negative composite rate, the U.S. Treasury does not allow the composite rate on I-Bonds to be set below zero.

Despite the 0 percent return, current holders of I-Bonds should consider several additional factors before rushing off to redeem them. First, this rate will adjust again in November and depending on inflation, it may exceed the current 0 percent rate. Secondly, there are tax considerations associated with redeeming I- Bonds. Interest earned on I-Bonds are taxable at the federal level. And finally, there may be penalties incurred for early redemption, such as the loss of some accrued interest, if you redeem the I-Bond within 5 years of your purchase.

For more information about I-Bonds, visit the U.S. Treasury’s savings bond web site at:
http://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

tags I-Bonds, savings bonds, US Treasures

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Jill Boynton is co-founder of Cornerstone Financial Planning in Newington, N.H. Along with traditional financial planning services, Boynton provides analysis specifically for divorce.

Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.

Cheryl Costa is a managing director at AFW Wealth Advisors, which has offices in Natick and Purchase, N.Y. She advises clients on investing, education funding, and estate planning. She holds a master’s in business administration from Boston University.

Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.