bank rates

I Bonds Will Pay 2.2% Over Next 6 Months

The bond yield, which will reset in November, is currently 2.2%In a move that should surprise exactly no one, the U.S. Treasury today set the fixed rate at 0% on all Series I Savings Bonds sold today through October.

When combined with the inflation component, I Bonds will earn 2.2% for the next six months.

That’s considerably better than the top-paying certificate of deposit on our CD Rates Leaderboard, but much less than the 3.06% the Treasury has been paying on Series I Bonds since November 2011.

The inflation rate on I Bonds changes every six months, so that portion of the return will reset this fall.

But for anyone looking to purchase a bond, the fixed rate — which is added to the inflation rate to get the total earnings rate — is set for the life of the bond.

And that fixed rate has been stuck at zero since November 2010.

As for the inflation component, here’s how Treasury figures it:

It tracks the changes in the Consumer Price Index for all Urban Consumers (CPI-U). So the CPI-U for September 2011 was 226.889 and the CPI-U for March 2012 was 229.392.

That represents an increase of 1.103%. (It appears Treasury only went to two decimal places in its calculation.) To get the annualized rate, you multiply by two.

That’s how Treasury arrived at the 2.2% inflation component.

You can find a detailed description of how the Treasury sets the rate on the TreasuryDirect website.

Yes, Series I Savings Bonds now pay less than they did. You can look at it as another blow to savers. Or you can recognize that I Bonds are still among the best, safest things going.

They pay better than even the top nationally available bank CDs. The only place you’ll find higher-paying CDs is at credit unions and local banks.

For example, the top-paying nationally available credit union deal on our list of highest CD rates pays 2.25% APY. You’ll find a handful of local deals that offer a slightly higher return.

Savings bonds also have several tax advantages over CDs:

  • You don’t have to pay tax on the interest you earn until the bonds are redeemed. With CDs, you’re taxed on the interest in the year it’s earned.
  • The interest earned on savings bonds is exempt from state and local income taxes. That’s a big plus for residents of states that levy a hefty tax on investment income, such as California and New York.
  • The interest can even be exempt from federal income taxes if the bonds are used to pay for eligible college expenses.

The major downside with I Bonds is the strict limit of how much you can invest.

Since the Treasury ditched most paper bonds at the beginning of this year, you must buy them online at TreasuryDirect.

The government will only allow you to invest $10,000 a year in a single type of bond under a single Social Security number.

Also, if you redeem Series I Bonds within the first five years, you’ll forfeit the three most recent months’ worth of interest. After five years, there is no early-withdrawal penalty.

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