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| Should You Redeem 0% I-Bonds? |
Submitted by:
Brent Hunsberger, The Oregonian 05/03/2009 1:57 AM
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The new I-Bond rate for the next six months is 0 percent, as suggested yesterday. Eventually, all I-Bonds out there will drop to this "return."
But that doesn't mean you should run out and redeem them, says Tom Adams, founder of Savings-Bond-Advisor.com You could end up cashing in a bond still earning an astounding 4- to 8-percent interest rate, or paying a redemption penalty.
"What I'm worried they'll do is they'll cash out now," Adams said.
I-Bonds accrue their new rate in six-month cycles based on their issue date, Adams explained. That means I-bonds issued in any October will still earn great rates (relatively) until October 2009. That's because their rates were reset in April 2009 based on rates announced Nov 1, 2009.
Bonds purchased in any previous November, however, immediately begin earning no return because their accrual date is May 1. Bonds issued in any December, however, will take on a 0 percent "return" next month.
Confused yet? If you want to see how any of this affects your bond holdings, go to treasurydirect.com's savings bond calculator. It'll give you past, present, even future returns for any I-bond you own.
Also, unless your I-Bond is more than five years old, you'll pay a redemption penalty of three months' interest, Adams said. So, let's say bought an I-Bond in October 2007, which currently earn a rate of 6.25 percent. If you redeem them today you'll not only give up earning interest at that rate for the next five months (a return you can't get anywhere else as safely), you'll also forfeit your last three months of interest calculated at roughly 6.17 percent.
"Ideally they should wait until the bond has earned 0% for three months" to redeem, Adams said.
Adams' bottom-line: Hold steady until the next rate is announced. "My personal advice is they've done quite well the last six months," he said. "Six months of 0 percent compared to what people in the stock market have suffered is not bad. And the rates are definitely going to go up in the future. I wouldn't say it's time to cash in your I bonds. I would say, OK, it's our turn to suffer a little bit."
Monthly investments in these bonds have generally outperformed investments in the U.S. stock market since their introduction in 1998, according to Adams. This stunning chart on his site shows by how much. I-bonds are a shining light in my portfolio and, so far, a better investment than state college savings plans.
Instead, you might want to hold off on purchasing any for the next six months and plug that money instead in a short-term CD or "high-interest" savings account.
Adams says on his blog: "Now is actually a relatively good time to put your monthly investments in the stock market rather than in Savings Bonds."
Adopted from The Oregonian's It's Only Money blog:
http://blog.oregonlive.com/finance/2009/05/ibond_rate_at_0_but_dont_panic.html
For background on I-Bonds see http://blog.oregonlive.com/finance/2009/04/beware_new_ibond_rates_come_ou.html or visit treasurydirect.gov |
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