Savings Bond Question
 

Hello! Since I plan to buy a house one year from now I've got a lot of reserves sitting in my ingdirect account earning 3%. So I'm thinking of buying bonds--60,000 I and 30,000 EE (the limit for me and my husband) before the end of this calendar year and then buying the same amount again in the next calendar year. Does it look like the rates will go up in Nov so that I should buy all of this year's then?
(I've already got my sights set on a Starwood-Quantas fun vacation with the miles earned!)
Thank you!

I would say it is way too early to tell what will happen in Nov. The I bonds are yielding lower than the 3% and are tied to inflation.

The E bonds are almost 4, and so it definitely makes sense to buy them now - even if they are to go up in Nov. They are tied to the 5 yr Treasury, which has actually come down a little bit - but what will happen in the next 5 months is anybody's guess (and anyone who claims they know simply fits into the category of those who call you and tell you they have a great stock to buy).

Regardless - check the billing cycle on your credit card, and try to buy AFTER it closes for a month, but by the 28th. This puts off the time to pay for them until almost 2.5 months after the issue date (they are issued on 1st of the month in which they are purchased).

While I would never think of recommending a stock, savings bond rates are based upon a LAGGED average of interest rates; therefore, there actually is some value in timing your purchases. Be that as it may, there doesn't appear right now, IMHO, to be a clear cut answer to the question of whether you should wait or buy now.

I am actually more concerned about your first statement. Since you are planning on buying a house within one year from now, I hope that you are aware that you cannot redeem your bonds for the first six months. (Really 5+ months -- see other discussions on savings bonds for lots of discussion about timing of purchases). Given that, a purchase late this year or early next year may not be available to you for a housing purchase made next year (or, at the least, won't be available for your deposit). In that case, depending upon the timing of your home purchase, you may want to buy now.

Pardon me for jumping in for a somewaht different question--
I understand about timing the purchase (wait after the credit card just cycled, and purchase near the end of the month), but is there anything to the timing of the sell? If I buy this month by May 28, when is the earliest date/time I can sell?

These would have a date of May, so you could sell on Nov 1 (or later). If you sell then you would lose 3 months of interest, out of which 2 months is float to you, so effectively you'd lose 1 month of interest.

There is a usefull tool on the savingsbonds.gov website called the Savings Bonds Calculator. I find it helpful in not just determining the current value of my bonds, but also in projecting when the bonds become redeemable and when the new rate will kick in. The last point is important if you're trying to maximize your return, since when you redeem your bonds before the 5 years are up, you lose the last three months of interest. Therefore, if you purchased the April I bonds, it might make sence to keep them for 9 months so that you get the 6 months of 4.4% interest and lose the 3 months of the new 2.57%.

I believe you could redeem on October 1, having held them during the 6 months of May, June, July, August, September and October.

Actually, according to the Savings Bonds Calculator, the May bonds are not redeemable until November. The way I figure it is that you can just add 6 to the month of issue to get the redeem month -- in this case:

5(May) + 6 = 11(November)

Do you know this from experience? I would think it would be Nov. 1 - since you wouldn't get credit for October until it is over - but I certainly don't know for sure.

In any event, it does seem like the best time to redeem is the 1st of the month. I would assume you get credit for the whole month, but again, I don't know that for sure.

You'd have to wait until Nov. 1 under the first poster's scenario. I do know for sure; I just did this. Cashed in bonds bought in late Nov. on May 1 and got three full months' interest.

JD




[This message has been edited by JoeDoakes (edited 05-24-2002).]

Thanks for the information. I stand corrected. I have purchased a lot of these since late last year ( 2001 and 2002 annual limits for family of four). I am thinking of churning them given the poor performance of the markets. I guess I'll have to add another month to my calculations.

People should also be aware that if you purchase more than $11,000 cash value (not face value) in any one year in the name of any one other person, you can have gift tax consequences even if the other person is your child, grandchild, etc. (no gift tax consequences if the other person is your spouse, though).

So let's be careful out there.

Doakes

[This message has been edited by JoeDoakes (edited 05-24-2002).]

However, also be aware that the gift tax exclusion amount applies to each individual who makes a gift. So if you're married, you and your spouse can give a combined $22,000 to as many individuals as you want.

JoeDoakes, how do they keep track of this - or do they? Littleleagueson has his own trust account but not a credit card. I "bought" more than $11000 worth of bonds in his name with my card and paid the bill with a check on his money market account (I'm the custodian). This obviously wasn't a gift.

However, also be aware that the gift tax exclusion amount applies to each individual who makes a gift. So if you're married, you and your spouse can give a combined $22,000 to as many individuals as
you want. [ENDQUOTE]

This is true; however, even though you will not have a tax consequence you must (subject to some exceptions) be sure to fill out a gift tax return in this case, which is called a "split gift." If it's just one person giving $11k or less to one other person, a gift tax return is NOT required.

JD