I Bonds: Hold Or Sell?

October 16, 2009 by TFB

Savings Bond Advisor reported that the next inflation adjustment on I Bonds will be 3.07%. I bought some I Bonds in April 2008 when the base rate was 1.2%. They will earn 0% starting this month through March 2010. Based on the 3.07% inflation adjustment, these I Bonds will earn 4.28% between April and September 2010.

I had planned to sell them in January 2010 after they earn nothing for three months. Now it looks like I will hold them one more year until January 2011.

If I redeem them in January 2011 instead of January 2010, these April 2008 I Bonds will earn

0% for 3 months (1/2010 – 3/2010)
4.28% for 6 months (4/2010 – 9/2010)
0% for 3 months (10/2010 – 12/2010, last 3 months of interest forfeited)

Over the course of 12 months, they will earn 2.14%. Right now a good rate on a 1-year CD is slightly above 2% (Alliant Credit Union 2.15%, 2.30% if over $25k). The 1.2% I Bonds will earn about the same or slightly more because they are state income tax free.

I will revisit this decision in January. If there are better opportunities elsewhere, I still have a chance to change my mind.

Because of deflation in late 2008 early 2009, all I Bonds have to go through a period of earning 0%. If you are planning to sell your I Bonds before their 5-year anniversary, make sure you sell only after they earn 0% for 3 months. Because you forfeit the last 3 months of interest, you want to forfeit 0%, not your high positive rates. Here's a table showing when the 3-month 0% period is over:

Issue Month	OK to sell on or after
January or July	10/1/2009
February or August	11/1/2009
March or September	12/1/2009
April or October	1/1/2010
May or November	8/1/2009
June or December	9/1/2009

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Keywords: I-Bonds
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Comments

2 Comments on I Bonds: Hold Or Sell?

enonymous on October 16, 2009 | permalink

Since I hold my I bonds as part of my emergency fund, I'm more than happy for it to grow at 1.2% + inflation over the next 20+ years. The put option of dumping them and rebuying only becomes useful if the fixed rate rises above 1.2% (all of my I bond holdings are 1.2% or slightly greater in fixed rate – I missed out on the early jubilee with the super high fixed rates!). A short period of 0% growth is better than the alternative of an unknown real yield in the long term. Moreover, the fact that I-bonds are completely tax deferred until they are redeemed (and they are 100% liquid – and rapidly) makes them a no brainer for emergency fund money. I would strongly advise those who hold I bonds at 1% or greater fixed rates to stick with them – especially if they are in a high tax bracket. They are one of the few good deals left out there.

Mr. GoTo on October 17, 2009 | permalink

You mention that I-Bonds are free from state income tax but it's also important to note that federal income tax on the interest is deferred until you redeem them. This is a huge advantage over CDs for example.

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