Should I roll over my November 2005 I bonds?
Monday, October 16th, 2006
Categorized as: Yesterday's News (old post archive)
I invested in Series I Savings Bonds in November 2005 with a fixed rate of 1.0%. If the fixed rate in November 2006 is higher, should I sell these bonds and purchase the higher fixed rate I bonds? If so, how much higher should the fixed rate be?
One of the interesting things about I bonds is that the Treasury is committed to paying you interest for 30 years, but you only have to guarantee that you'll hold the bond for one year. This creates the opportunity you're interested in - rolling your investment over into bonds that pay a higher interest rate.
What you lose when you do a rollover is your last three months of interest. In this specific case, that doesn't amount to much, because the rate your I bonds are earning now is just 2.01%. Three months interest at that rate is about $5 per $1,000 of investment.
What you gain when you do a rollover is the higher base rate. Because your bonds aren't a year old yet, you can't roll them over until November 1. If the base rate for new bonds purchased after November 1 doesn't change from the current 1.4%, the additional 0.4% of interest would earn you $4 per $1,000 of investment per year.
In this case, you'd make the $5 penalty back in a little over a year.
Of course, we don't yet know what the fixed-base rate will be on the November 2006 I bonds, although it currently appears unlikely that it will be more than 1.4% or less than 1.0%. Update: As of Nov 1 we know it's 1.4%.
If the base rate is 1.4%, then it makes sense to roll your bonds over in November. Update: Several readers have pointed out that I forgot to mention that you'll lose tax-deferral if you do a roll over. I bonds with low base-rates are all so recent I don't think this will be a huge deal, but if you're in a high tax bracket it's another thing to consider.
But if the new base rate is 1.1%, it would take five years to earn back the $5 early-withdrawal penalty. In that case it would be tempting to wait for a better base rate before rolling over the bonds.
When doing roll overs, keep in mind that Savings Bonds have maximum annual purchase limits. Roll overs count against that limit.