 Stick with the I bonds
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 Dear
Dr. Don,
I began purchasing Series I bonds in 2000 through my former employer's
payroll plan. Would it be better to turn these bonds over into a
bank savings account or perhaps a money market account to make my
money gain a better interest rate?
-- Napoleon
 Dear
Napoleon,
Savings bonds have a one-year minimum holding period, and even after
that one-year period, there's an early redemption penalty equal
to the last three month's interest if a bond is redeemed in the
first five years.
If you haven't done so already, input these bonds into the
Savings
Bond Wizard at TreasuryDirect to construct a portfolio listing of your holdings. If
the bonds are held in a TreasuryDirect account, the Savings Bond Wizard shouldn't
be necessary.
As you no doubt know, the interest earned on a Series
I bond changes every six months. The interest earnings have
two components, a fixed rate that is set for the life of the bond
at the time of purchase, and a variable rate component that changes
every six months based on changes in the inflation rate, as measured
by the consumer price index, or CPI. The TreasuryDirect
Web site provides a page showing the fixed rates, variable rates
and the current earnings rate on Series I savings bonds. The
composite rates for Nov. 1, 2006, to May 1, 2007, from the TreasuryDirect
page are shown below.
Composite earnings rates
The fixed rates and semiannual inflation rates are combined to determine
composite earnings rates. An I bond's composite earnings rate changes
every six months after its issue date. For example, the earnings
rate for an I bond issued in March 1999 changes every March and
September.
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| Composite earnings rates |
|
|
| ISSUE DATE | EARNINGS
RATES* |
| *Annual rates
compounded semiannually. | |
My point is that you're currently earning from 4.12
percent to 6.55 percent on these bonds. You're not paying state
or local income taxes on the investment income. You have the
ability to defer taxes until you redeem the bonds or they mature. You
might be able to use them to pay for qualified education expenses
under the provisions of the Savings Bonds for Education program
and not owe any tax on the earnings at all.
Are you really going to pick up all that much yield
by selling the bonds, in some cases paying an interest rate penalty,
and reinvesting in a money market account or a money market mutual
fund? I think it's an iffy proposition, especially long term,
and you're likely to be better off right where you are. An
earlier Dr. Don column, "A
primer on I bonds versus TIPS," has some additional thoughts
about redeeming a Series I savings bond in the first five years.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
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