tooshy, I have found the savings bond wizard to be very reliable. If your bond with 4 months longer interest has a lower effective yield, it's most likely because those four months of interest had a lower rate than the effective yield of your shorter bond.

Let's see, I believe both of them would be 1.6% fixed and would have started out with the same semiannual inflation rate. I don't have the wizard app with me right now so I'll have to figure some of this manually. Disregarding penalty for a moment, your 12/02 bond would have most recently switched from about 2.60% to about 4.70% in December and the 4/03 bond the same this month (forgive that I don't include the small cross product term in the interest rate calc). However, for the 12/02 bond you currently lose 3 months of 4.70% interest, and for the 4/03 bond you lose 1 month of 4.70% and 2 months of 2.60% - so your penalty for the 12/02 bond is higher.

I think that's why it has a lower effective yield: after penalty, your 12/02 bond has two months of 4.70% and two months of 2.60% more interest than the 4/03 bond - however, the average yield of this 4 month period is only 3.65%, less than the effective yield of your 4/03 bond to date. This pulls down the effective yield of the 12/02 bond.

I agree with you that the impact of the penalty is not easy to understand without taking considerable time looking at various scenarios.

mariojm,

Excellent reply to tooshy.You explained a difficult item to explain in a very clear way.This shows the potential of fat wallet in a very good way.Thanks.

mariojm said:Thanks dj, you're an excellent explainer yourself!

One more thought I'd like to add to the penalty, specific to the bonds that are about 4 years old ... at that stage, taxes are probably more likely to affect your returns when you cash out than the penalty. A 4 year old bond will have earned interest for 45 months (after penalty); if you're in the 25% marginal bracket, taxes will eat 11 months of that if you redeem. If there's a chance that you might be in the 15% rather than 25% bracket some time in the near future, it makes a 4.5 month difference.

Of course I'm greatly simplifying this because in reality the bond interest changes every 6 months. But it's probably even worse than I described. When you redeem with penalty considerations, most likely you'd do it in a 6 month period of low interest. But the interest you've already earned, that's taxable, probably would have been at higher interest. So you have a lot of control over minimizing your penalty by redeeming at the right time, but little control and perhaps much uncertainty over the tax implications.Good point mariojm. However, I'm math challenged (or dementia onset) so I cannot get into the fine comparisons as you. Maybe I'll tag along with your cues when many in this forum will have redemption/tax questions next year...but I made a hasty effort to postpone 2006 taxes to 2007 (since I knew this year will be a lower tax year for us) by redeeming in January, though I think those bonds (12/03 ibonds/EE) would have better been redeemed in Sept 2006 penalty wise (three months of 2.11).

About next year's redemption for these bonds, roughly I think it is 1/08 for the 12/02, and 5/08 for the 4/03...I planned on holding these til retirement (and also wanted to buy more should the fixed go up) but these past five years have shown ibonds were a very poor investment. Keep or hold I'm not sure anymore.

I'm speculating that the government wants to kill the savings bond program. First they introduced TreasuryDirect for savings bonds, then they added marketable bonds (bills, notes, bonds, TIPS) to TD, and if you look at the side bar on TD, savings bonds have moved all the way down on the menu and marketable bonds are on top.

Maybe the savings bonds program costs them too much even all-electronic and it's cheaper for them to have the savings bond buyers use the much larger marketable bonds program instead?

me too...unlike the rate chasers, i wasn't ready to immediately "bail out" of these just because they would occasionlly have a lousy 6 month interest period. Trouble is, they seem to have it much too often now....and though i loved the fact they were tax-deferred, i am about ready to bail out of these, myself.....

dj said:I bailed on the ones I had with a 1.6% fixed rate.
I will hold my 3% fixed rate ones for a while longer.

I dumped all my I bonds and a stack of EE from the 90's, 6 months ago. ate the tax, which I'd eventually have to pay anyhow unless I croak first.

All except for the nice wad of 3%'s. Why would you sell those, ever?

My girlfriend will take MBA in the coming August. Is that possible that I can give her my I-bond so I can prevent tax? Thanks.

kcheong15 said:My girlfriend will take MBA in the coming August. Is that possible that I can give her my I-bond so I can prevent tax? Thanks.

I thought about doing this myself when my girlfriend (now wife) was still in school. First of all, she'd have to be a co-owner or beneficiary to even redeem the bond. Adding her as a co-owner will not create a taxable event, but the tax laws clearly state that savings bond interest is income to the co-owner who provided the funds for the bond. (Publication 550) I'm not sure if registring her as sole beneficiary will create a taxable event for you but I would think it does. If both of you have been co-owners from the beginning, it may be difficult to track who provided the funds, so if either of the co-owners cashes it, it may be difficult in some cases to prove whose tax event it is, that's all I will say. If I remember correctly, if the person who didn't provide the funds cashes the bond, they are supposed to issue a 1099 to the other co-owner. In any case, with our situation (even though we were co-owners from the beginning) I felt there was sufficient evidence that I provided the funds that I didn't ask her to cash them in.

However, another thing you can do is to redeem it tax-free for her education, but I believe for that you have to be married. (and there are income restrictions, and you can't count it for education if you claim other education tax benefits on the same portion of her qualified education expenses)

Are any of you guys thinking about moving to TIPS ?

I have a bunch of 1.6% I bonds, and my tax bracket this year is quite low. Thinking of dumping them all.

wearetheborg said:Are any of you guys thinking about moving to TIPS ?

I have a bunch of 1.6% I bonds, and my tax bracket this year is quite low. Thinking of dumping them all.

I'm definitely moving to TIPS! I think some inflation-indexed securities are good to have, for those worst-case high inflation scenarios which seem to come and go every couple of decades. But at the current fixed rate that the Treasury sets for I bonds in comparison to TIPS real rates, I can't justify buying I bonds for myself (it would depend on specific tax situation). For almost two years now, I have only redeemed I bonds and bought TIPS (although I have substantially reduced my inflation indexed overall amount).

As far as the 1.6's, it would depend on your tax situation, but I would only cash them out for TIPS if TIPS were moving above 2.5% again, and I'd probably stick to 5 or at max 10 year maturity TIPS as a former I bond investor. The "variable maturity" feature of I bonds, 1-30 years, is still something nice to have.