I Bonds Purchase Limit Restored to $10,000, Backdoor Still Open

The U.S. Department of Treasury announced today that the maximum purchase limit for Series I Savings Bonds (“I Bonds”) is set to $10,000 per person per calendar year, effectively immediately.

Previously the purchase limit was also $10,000 per person per calendar year, but it was $5,000 maximum for online purchases at TreasuryDirect and another $5,000 maximum in paper bonds. After the elimination of paper bonds sold at banks and credit unions effective in 2012, some investors were concerned that the move effectively cuts the annual purchase limit in half if the maximum for online purchases is left unchanged at $5,000. With today’s announcement, investors will have the same annual maximum purchase limit, albeit all in electronic format.

The announcement from the Treasury Department also confirmed once again the backdoor to additional $5,000 in paper I Bonds remains open.

“An investor still can purchase up to $5,000 annually in Series I paper savings bonds using his/her tax refund and IRS Form 8888.”

Since the real yields on TIPS maturing in up to 10 years are negative at this moment, I Bonds with a fixed rate of 0% plus variable inflation adjustments are a much better deal than TIPS under 10 years. Not only do I Bonds pay more, but they also have much less risk and more flexibility.

I will buy the maximum amount of I Bonds I’m allowed to buy around January 25. I will also use the backdoor for additional $5,000 when I file my tax return.

Hat tip to Nickel at Five Cent Nickel. For some reason I didn’t get the announcement email from Treasury.

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Comments

  1. SD says

    Hi,

    You mentioned you will be buying maximum ibond in Jan 25. What if I buy in May/Oct, how will it change the interest rate….

  2. Harry Sit says

    SD – With the real yield on TIPS at negative, I expect the fixed rate will stay at 0% throughout 2012.

    If you buy in January, you will get the current 3.06% rate for six months and the inflation adjustment to be announced on May 1 for six months and the next inflation adjustment to be announced on Nov. 1 for another six months and so on.

    If you buy in May or October, you will miss the current 3.06% rate for six months. Not a big deal in the grand scheme, but if you already have the money in a savings account earning less than 3.06%, you might as well buy now. If you don’t have the money yet, try to buy as much as you can in April, which is the last chance to catch the 3.06% rate for six months. Come May 1, the 3.06% rate will be gone.

  3. nickel says

    Thanks for the link, TFB. If you’re not waiting until May, is there any particular reason you’re waiting until January 25th instead of acting now?

  4. dd says

    Just purchased some I-Bonds after looking at current CD and bond rates. Thanks for the tip on purchasing 10K online.

  5. Harry Sit says

    Nickel – Just the old habit of buying toward the end of the month in order to earn a bit more interest on my money in the savings account. I will still get interest from I Bonds for January whether I buy them now or at the end of the month.

    The difference is small. For $10,000, holding on to it for 3 more weeks at 1.15% interest rate in my savings account at Alliant Credit Union will earn me $10,000 * 1.15% * 3 / 52 = $6.63 before tax. But since it doesn’t take any extra effort to wait 3 weeks, I will wait.

  6. nickel says

    Ahh, good point. Wasn’t sure if it was a cash flow issue (waiting to get paid) or if it was something more strategic.

  7. Patrick says

    TFB – Noticed that the Nov. and Dec. inflation numbers showed slight deflation for both months (2 of the 6 that will factor into the next reset). I know it probably makes sense to buy now since the 3.06% is still so attractive, but assuming the scenario of prolonged deflation or minuscule inflation, is there a point at which you liquidate for a different risk free return? Or do you just plan to build up inflation protection and continue adding to it even if the yield is 0% for a prolonged period of time (hypothetical of course).

  8. SD says

    You mentioned that for first six month I will get 3.06 from Jan to June. Now in April, the new rates come out, I will get that rate…say 2.5% from May to Nov,,,so yo meant to say that I bonds which i purchased will get 3.06% for 6 month and 2.5 for the other 6 month….I read somewhere where one of the person was recommending to wait till May…how does it affect..would appreciate if you let us know…

  9. Harry Sit says

    Patrick – In a prolonged period of deflation or minuscule inflation, it’s possible a CD will do better. I Bonds with a 0% fixed rate will earn nothing if there’s deflation. If at the same time a CD pays 1%, I’d switch to a CD unless by an off chance the fixed rate is raised to compensate for deflation or lack of inflation. Then I’d sell my 0% I Bonds to buy new I Bonds with a positive fixed rate. Note there has been a six-month period when new I Bonds earned 0% fixed and 0% variable for a combined 0%. I wonder who bought I Bonds at that time. Fortunately deflation quickly reversed to inflation.

    SD – You stay on every rate for six months before you move on to the next rate. If the inflation adjustment announced in May is 2.5%, the bonds you bought in January don’t move to it immediately. You will get the 2.5% rate starting in July. Whether you buy now or in May, you will get the May rate for six months sooner or later. The only difference is whether you get the current 3.06% rate for six months.

    When you don’t expect an increase in the fixed rate, it should be really simple. If the current rate is good, buy now. If the current rate is bad, wait for the new rate in May or November. Right now the 3.06% rate is pretty good. So buy now. If the inflation adjustment in May is even better, you will get it in the next cycle anyway. The only reason for waiting until May would be hoping for a higher fixed rate. Never say never but I don’t think it’s going to happen.

  10. nickel says

    TFB: I’m curious as to how you’ll be exploiting the backdoor. Are you expecting a sizable return? If not, will you be make a 1040-ES overpayment this month? Or maybe filing an extension (along with a payment to get you $5k over) and then filing once the payment clears?

    • Harry Sit says

      Nickel – I will file an extension with a payment after I do my taxes. That way I will know how much to pay. I can’t figure that out before 1040-ES is due.

  11. nickel says

    That’s what I figured. I will likely do the same thing, though it might be tough to get the current rate unless you file early.

  12. quik says

    TFB, do you anticipate applying the ibond gains to qualified educational expenses? Otherwise, it seems to me that you’re locking in a negative real rate, after taxes, with a fixed rate of 0%.

    Before taxes, you’re guaranteed 0% real return, but you’ll pay ~1/3 of any positive average inflation rate to the government. I’m not sure how favorably ibonds in a taxable account compare to TIPs in a tax-advantaged account.

  13. Harry Sit says

    @quik – No I’m not planning to use them for qualified educational expenses. If an opportunity arises that enables me to use them that way, say I want to take some classes after I retire, great; if not, I’m not counting on that.

    I’m not too concerned about locking in a negative real rate after taxes. Everything under 10 years is paying a negative real rate right now. If you are not maxing out your tax deferred accounts, you should do that first. After you max out tax deferred accounts, I Bonds in a taxable account still beats short-term CDs. I treat my 0% I Bonds as short-term CDs. If in five years the fixed rate goes positive, I will sell them and re-buy at a higher rate.

  14. Arnie says

    Assume I “cash” a $10,000 (face value) FEB-2001 I-BOND this year (2012):

    Can I now buy a maximum of $20,000 in electronic I-BONDS during 2012?
    Or does the limit remain at $10,000?

  15. Harry Sit says

    @Arnie – It wouldn’t be very smart to cash a $10,000 face value Feb-2001 I Bond this year, but if you did so, the limit still remains at $10,000.

  16. Kristin says

    If we file form 8888 for our 2011 taxes and get a maximum of $5K in paper bonds, Does the $5K count toward 2011 or 2012? They would be bought in 2012 with the tax return money but I’m a little confused because it is with the 2011 tax return?

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