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How I bond rates are calculated
Backed by the US government, I bonds do not lose value and earn monthly interest in two parts: a fixed rate, which can change every six months for new purchases but remains the same after purchase, and a variable, which changes every six months. month depending on inflation.
TreasuryDirect announces new rates in May and November.
You can estimate the new variable part of the rate based on Consumer Price Index data from the previous six months, which measures inflation.
The Department does not disclose how it determines the fixed portion of the rate, but experts believe factors such as demand and the yield of inflation-protected Treasury securities influence it. For example, a higher TIPS yield could factor into a decision to raise the fixed portion of an I bond’s rate.
While the consumer price index was still relatively high in September, the drop in the bond rate reflects a downward trend over the past six months.
Early estimates of the I bond rate were 6.48% based on inflation figures. However, the new rate includes an increase to 0.4% for the fixed portion of the rate, taking into account higher TIPS yields, Tumin said. The previous fixed part of the rate was zero.
What the rate change means for older I bonds
If you bought I Bonds before the last rate announcement, when your rate changes and what it changes will depend on when your bonds were issued.
For example, if you bought I bonds in September of a given year, your rates will reset each year on March 1 and September 1, according to the Treasury. Bought in June? Look for changes every December 1 and June 1.
The overall rate may be different from what you receive, as the fixed rate remains fixed for the term of your obligation.
Someone who bought an I bond in September 2004, for example, has 1% for the fixed part of their rate. Their composite rate was reset to 10.67% in September and will drop to 7.51% when they next reset in March 2023, according to Treasury data.
The Disadvantages of I Bonds
While the current I bond rate may be attractive, experts point to several downsides. And some of them are potentially expensive.
One of the trade-offs is that you can’t touch the money for at least a year. There is a three-month interest penalty if you redeem the I bond within five years of its issuance.
Another downside is lower future returns, explained certified financial planner Christopher Flis, founder of Resilient Asset Management in Memphis, Tennessee.
Depending on future inflation, the variable part of the interest of the I bonds could adjust downwards again in May. Aiming for 2% inflation, “the Federal Reserve isn’t going to rest until that number comes down,” he said.
And as interest rates rise, the difference in yield between I bonds and other government-backed assets, such as Cash 2 years, becomes smaller. “The relative attractiveness of these assets is declining,” Flis said.
Even with a surplus of cash after covering other financial priorities — no credit card debt, an emergency fund, and your 401(k) match — Flis wouldn’t choose I bonds as his next option.
“Long-term investors, especially younger ones, should really look to the stock market to form the backbone of their portfolio,” he said. “Certainly not bonds.”
I Bond Frequently Asked Questions
1. What is the current interest rate? 6.89% per year
2. How long will I receive 6.89%? Six months after purchase
3. What is the deadline for obtaining 6.89% interest? Bonds must be issued by April 30, 2023. Purchase deadline may be earlier
4. What are the purchase limits? $10,000 per person each calendar year, plus an additional $5,000 in Paper I Bonds through your federal tax refund
5. Will I owe income taxes? You will pay federal income taxes on the interest earned, but no state or local taxes
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