Yesterday, the Treasury Department reset the rate on its inflation-adjusted savings bonds, or I Bonds, to 4.52%. Although the rate is an improvement over the previous rate of 2.41% for I Bonds bought after April 30, it is still well below last fall's rate of 6.73%, which was buoyed by a spike in energy prices in the wake of Hurricane Katrina.
Two parts. The current 4.52% rate includes a fixed-rate of 1.4% that lasts for the 30-year life of the bond. It also includes 3.1% annualized rate of inflation as measured by the percentage change in the consumer-price index for all urban consumers, or CPI-U, from March through September. The Treasury Department says it comes to 4.52% after rounding.
The inflation-adjusted rate is reset every six months, on May 1 and Nov. 1. But it's the fixed rate of 1.4% that will matter most to investors over the long term. Based on yesterday's rate change, investors who buy I Bonds between now and next April can essentially expect a 1.4% return after inflation.
For investors looking for a hedge against inflation, high-yielding certificates of deposit or TIPS may be better alternatives than I Bonds. Five-year TIPS, for example, are yielding about 2.5% after inflation -- which is the rate that investors need to compare to the I Bond's fixed 1.4% rate, says Greg McBride, senior financial analyst at Bankrate.com. And with five-year CDs paying yields as high as 5.75%, investors can still reap a real return of 2.75% even if inflation runs at a 3% annually for the next five years, he says. "The CD still comes out way ahead of the I Bond, even if you have to pay state and local taxes."
But I Bonds are still appealing to many investors, particularly conservative, older investors in higher tax brackets who want to defer interest income to minimize their taxes, says Daniel Pederson, author of "Savings Bonds: When to Hold, When to Fold, and Everything in Between." That is because investors can defer paying federal taxes until they cash in their bonds; interest is also exempt from state and local income taxes.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.