investing

Keeping I bond should pay off over time

Don Taylorq_v2.gifDear Dr. Don,
I saw your article recently about I bonds. You said if you have a great fixed rate, you're probably better off keeping them. I have a fixed rate of 2 percent. Is that high enough to warrant my keeping them in your opinion? I saw an online 12-month CD at 2.8 percent and can't decide what I want to do.
-- Jaime Juncture

a_v2.gifDear Jaime,
In the overall scheme of things, a fixed-rate component of 2 percent on a Series I savings bond is a great, or at least very good, rate. The combined rate you'll earn over the next six months won't be competitive with what you could earn on a CD because of the negative inflation component. But I'll stand by my advice of not cashing in a Series I bond with a great fixed rate.

The -5.56 percent annualized rate of inflation announced May 1 by the Treasury means you won't earn any interest on your Series I savings bond over its next six-month earning period.

As discussed on the TreasuryDirect Web site, "When the inflation rate is less than zero, a bond's earnings rate is less than its fixed rate (but the earnings rate is never less than zero)." Since the negative inflation rate outstrips even the highest fixed-rate component of 3.6 percent, all Series I savings bonds will earn zero percent interest over the next six-month earning period.

Tough it out, the ability to earn inflation plus 2 percent for up to 30 years will look like a very smart investment over the long term. You can defer income taxes on this investment or pay taxes annually based on the interest earnings, including the inflation component. But once you start reporting interest annually, you have to continue doing it for all the savings bonds you own.

See the TreasuryDirect Web page "Series I Savings Bonds Tax Considerations" for more information. Talk to your tax professional if you're uncertain which approach is better for you.

Read more Dr. Don columns for additional personal finance advice.

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