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Article:My (author) thinking: I Bond investors who haven’t purchased their full allocation ($10,000 per person per calendar year) should consider making a purchase before the end of October — I’d suggest Oct. 28 to give a margin of safety. An I Bond purchase late in the month earns a full month of interest. But don’t cut this too close to Oct. 31.
Buying in October locks in the current fixed rate of 1.10%, which is likely to go lower for purchases after November 1. It also locks in the current composite rate of 3.98% for a full six months, and then a potentially higher composite rate in the next six months. That sort of yield should be competitive with T-bills if the Fed continues reducing interest rates this year and next
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Swapping your current 0% (fixed rate) I-bond for a new one paying 1.1% will cover the early withdrawal penalty (3 months interest) in about 8 months (3.98% vs 2.86%). After that, you'll be getting a rate that's 1.1% higher than your current rate.
If you wait until next spring to swap, you may get a fixed rate that's lower the current offering of 1.1% for the life of the I-bond (or however long you choose to hold it). And you'll only be saving a quarter of the penalty, since a replacement I-bond now will have made up 3/4 of the penalty by then.
Tax considerations:
The penalty for early withdrawal is pre-tax - a reduction of the interest declared, not a payment of post-tax money to the Treasury Dept. (Still looking for what I consider an authoritative source to connect the dots between forfeiture of interest and tax treatment, but believe this to be correct.)
The interest on your current I-bond is fully tax-deferred until you cash out the I-bond or until it matures in 2051 (30 year final maturity). It is also state tax exempt. You would owe taxes whether you cash out as you wrote or you swap for another I-bond (that's still a redemption).
Paying tax now might not be a bad thing if you're in the 12% tax bracket.
If you are in a low bracket and also drawing Social Security, the added income could raise the amount of SS subject to income tax. (For many people the percentage of SS that's taxable is between 50% and 85% computed in a somewhat inscrutable manner.) It's possible (don't know, wild guess) that the effective tax rate on a dollar of added income might move from 12% closer to 22%. Experimenting with last year's tax software should give a clue.
My perspective on I-bonds is that they are cash, not bonds. They have a known, always rising value, like a bank CD (including its early withdrawal penalty). This is unlike a bond that can lose value or a brokered CD that is nearly illiquid.
I agree that there are better options for investing if you're thinking about some bond choices. Are there better options for cash (or "near cash") in a taxable account? I don't know.
Using T-bills as a benchmark, a new six month CD will yield around 3.7% (Fidelity estimate). It will be pretty liquid (just a small potential loss in secondary market). It will be taxed in 2026. In comparison, a new I-bond will yield 3.98% for its first six months. It will be tax-deferred and unredeemable (for a year). Or, given your thoughts on the I-bonds now, perhaps irredeemable
Second, I bond has a five-year holding period without incurring a 3-month penalty. To us that is a bit long on the liquidity side. I may give up a bit by building a 5 year ladder consisting of 6 months T bills. At least there will be fund available every 6 months as T bill matures.
Third, this is my opinion only. Will the FED remain independent and what is the probability of manipulation of the inflation rate by future board?
That doesn't help increase your holdings though. It also doesn't help replace the value of those 2021 I-bonds because they've appreciated (four years interest).
Also, and I'm being pedantic here, the $5K purchase allowed with tax returns was per tax return. A couple could buy $10K with their tax refunds only if they filed separately. Regardless, that refund purchase went the way of the dodo when paper bonds were discontinued.
The three month penalty technically doesn't reduce liquidity. Though I appreciate the hesitance to incur that penalty. In that sense the penalty is doing its job of reducing outflows.
One often sees suggestions to invest in longer term CDs for the short term if their yield after early withdrawal penalty is better than a shorter term CD held to maturity. With this in mind, I tend to give less weight to small (3 month) penalties than other people. Each person's take on withdrawal penalties is a little different.
Finally, inflation is determined (set?) by BLS. And that is not an independent agency like the Fed but a part of the Department of Labor. Which may be even more disconcerting. The September CPI figure has already been delayed from Oct 15th to Oct 24th. This figure affects I-bond rates and SS COLA. And is it being released despite a government shutdown. All of those factors make the figure suspect.
I'm about as far as one can get from a conspiracy theorist, but one has to wonder about a figure produced by a department that recently fired its head (Erika McEntarfer) and couldn't get a hack appointment (E.J. Antoni) confirmed. A department that furloughed its employees only to call them back to produce this number.
I suspect that like most government employees, they're not being paid. Though I'll bet they know how much they're owed, down to the penny.