November 09, 2023
This Ask KT & Suze Anything episode is all about Series I Bonds. KT asks Suze 12 of your pressing I Bond questions, so get out your Suze Notebooks for this important lesson.
Listen to Podcast Episode:
Suze: November 9th, 2023. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen.
KT: Why are you, why are you laughing?
Suze: Because you have the biggest smile on your face and I can't figure out why.
Suze: And I look over at you and you're staring at me with this incredible smile. So I laugh anyway.
KT: Well, you make me smile, you make me smile, but I'm really smiling because when you hear what I picked out, you're gonna go crazy. You're not gonna go crazy.
Suze: Alright. So this is the Ask KT and Suze Anything podcast. And today as I promised you on Sunday
Suze: that we were getting a lot, a lot, a lot of questions on series I Bonds and what you should do about them. Because on November 1st, actually, it was October 31st. But that's besides the point on those dates, the interest rate for Series I Bonds changed to 5.27%. However, the big change was as you know,
Suze: series I bonds are made up of a variable interest rate that is only good for six months. And the annualized interest rate was quoted at 3.94%. But the fixed interest rate. Why are you laughing? Oh, here we go. Here we go. We're just starting,
KT: sorry. I don't mean to laugh but Suze, I have to tell you when I started reading these, I felt so good. Do you know why I knew I wasn't alone.
KT: This is one topic. I just cannot figure out or get a hint that
Suze: a few times ago we stopped investing in series I bonds. the new interest rate was made up of two really three components, but
Suze: the composite was 5.27%. But the big hubbub is about the fixed interest rate, which means it is forever of 1.30%. And many of you own series I bonds. Those who bought the 7.12% 1 or the 9% ones have a 0% interest rate.
Suze: So you have been hearing from, I don't even know who. But anyway, you have been hearing you should cash out your 0% fixed rate bonds and buy these new ones. So that has created a flurry of questions that Miss Travis has fielded. And it's gonna ask me right now
KT: And listen everybody. I'm not gonna do names or intros or anything.
KT: Cute. I'm getting right to the point here. The reason is I've selected 12. I don't know if we can get through all of them, but
KT: it's just so confusing. So here we go. All right. Ready.
Suze: What if I said no?
KT: We're going, we're going for it, Suze. Why is everyone saying that I should sell my eye bonds? I bought in November 2021 and in May 22 when you first told us to, I love the interest rate that I got at the time. So why should I be selling them now? Question number one.
Suze: All right. And the reason that many people are saying that you should
Suze: is that when we first started to talk about Series I Bonds way back when like 2, 3 years ago. Now whatever it is, the truth of the matter is interest rates in the world were at like 0%. Maybe a treasury was at one or 2%. But Series, I bonds were giving us 7% 9%.
Suze: But that was the variable rate that changes every six months. As I said just a little bit ago, it changes every November and May 1st. Ok.
Suze: Series I bonds, as I also just said, are made up of two components, the variable rate and then there is a fixed rate that never changes the fixed rate on the series I bonds that you were buying is 0%.
Suze: When your I bond interest rate changes every six months, you don't get to participate on those I bonds in what the new fixed rate is. The new fixed rate is 1.3%.
Suze: So the interest rate that you are getting when the interest rate applies to you on your money is only going to be approximately 3.94%.
Suze: So what everybody is saying is why not redeem them
Suze: by new ones? And then you would be at 5.27% versus 3.94%. That's why they're saying you should do it, KT did that make sense?
KT: It did. But I have to barrel through these because these questions are, they sound like they're all the same, but they're actually not. So the next one is I have 10,000 of a zero fixed I bond
KT: $10,000. Do I have to redeem it all at once?
Suze: Any I bond, it doesn't matter when you bought it. What's going on with the interest rates? You never have to redeem 100% of that I bond. You can redeem if you have a $10,000 I bond, you can redeem $2000 1000 dollars, any amount of money that you want. However, normally you have to leave at least $25 in there for your I bond to still be valid. Yeah.
KT: The third question if I change from an I bond that is offering me a fixed rate of 0.90%. Should I redeem now to get the new fixed rate of 1.3%?
Suze: Absolutely not listen, this strategy of redeeming your I bonds to now purchase this new I bond that was just issued at a 1.3 fixed percent.
Suze: Only in my opinion, really, really makes sense if you have a 0% fixed interest rate attached to your particular I bond.
Suze: If it's at 0.4% or the 0.90% especially the 0.90% it makes no sense. What so ever? All right.
KT: So this next one will address that. Exactly, Suze. I've been investing currently in C DS since I live in a tax free state. However, I also listen
KT: to you and purchase $10,000 of I bonds back in both 2021 and 2022 at a zero fixed rate. I don't need this money. Should I redeem both of them this year and buy the 1.3 fixed I bond.
Suze: The truth is if you don't need this money
Suze: and you were investing in I bonds for the inflation protection, not just for the interest rate that you were getting
Suze: and are you better off taking this money and putting it in treasuries or C DS and locking up a higher interest rate? Are you better off doing that or was your objective truthfully... Not just to get the highest interest rate, but to have an investment that protects you against inflation, which is what Series I bonds are supposed to do. Now,
Suze: I get all of you are just freaked out about this 1.3% fixed rate.
Suze: So in this particular case, if your objective is to have inflation protection,
Suze: then yes, you should redeem the two bonds that you have to repurchase this 1.3% fixed rate bond. However,
Suze: remember there are many ways to put in more than $10,000 but just let's assume in your case, the maximum that you can put in to an I bond is $10,000 a year.
Suze: So I personally would probably redeem one this year and reinvest it because remember when you redeem it, you are going to owe income taxes on it on the interest that you earned. So if you redeem both of them, now you're going to owe income taxes this year on the interest that you owed on both of them.
Suze: And since you can't buy more than $10,000 this year, why not redeem one this year next year, January 1st, we're only like two months away from it, redeem the other one and buy this 1.36% bond I bond next year. That's what I would do. You just always, everybody wanna make sure that when you redeem
Suze: your I bond that you are in the lowest interest rate that they're currently charging, you because remember you're going to have to pay a three month interest penalty. So you don't want to pay it if you were still making 6% on your I bond or whatever, you want to make sure your I bond is charging you in annualized like three point something percent. All right.
KT: Ok. Next,
KT: I've been told that the 1.3% fixed interest rate means I can never earn less than 1.3% Suze, is that true?
Suze: That's your quizzie KT!
KT: Oh my God. I think the answer is no.
Suze: Why would you say that? It's a fixed interest rate?
KT: Because it said I've been told that the 1.3 fixed interest rate means I can never earn less than 1.3%.
Suze: Is that true? Yes or no?
Suze: Yeah, that's true.
Suze: You so... is it KT?
KT: All right.
KT: I'm a little bit confused.
Suze: That's all right. You can because obviously whoever told this person that is also confused, it does not mean that please be aware everybody that the fixed interest rate
Suze: isn't fixed. If the inflation rate all of a sudden starts to deflate and it's under the 1.3%. You could actually then get that interest rate decreased. The good part about an I bond is the interest rate can never go below 0%.
Suze: So you can never have no KT, you can never have negative interest rates. It's possible like if you bought tips, you'd be in trouble so, and tips treasury and it doesn't matter.
KT: I don't know what a tip is
Suze: That's not what we're talking about right now. All right. Go on.
KT: Ok. So question number six,
KT: don't I get the new rate of I bonds when my six months are up? So why should I redeem any of them and pay a penalty and taxes?
Suze: Because if you have an I bond that had a 0% fixed rate, you absolutely, every six months get whatever the new declared interest rate is, the variable one.
Suze: However, you don't get the 1.30% fixed rate. So that would mean that when your bonds get credited with a new interest rate, they're only going to get the variable rate, which is 3.94%.
Suze: So you're not getting the 5.27 annualized yield, you're getting the 3.94% annualized yield. That's a big difference.
Suze: What's wrong?
KT: So, so do I get the new rate? So you don't get the new rate after...
Suze: They get the new variable rate...
KT: but you don't...
Suze: They don't get to participate ever in the new fixed rate, the fixed rate.
KT: So the big question here is, do you redeem them? Like you have to kind of do a little bit of calculating to see what...
Suze: listen, if you have a Series I bond, that's at a 0%
Suze: fixed rate. You past your one year period where you cannot redeem it and your three month interest penalty is really very low. You know, it's not even 1% really. If that is true. And your intention was listen to me, everybody to have an investment
Suze: that was for inflation protection. You wanted an investment that was part of your fixed income portfolio along with C DS and treasuries and maybe preferred stocks and dividend stocks, whatever it may be, then truthfully, you should redeem and buy this new one. Absolutely. However, if that wasn't your intention,
Suze: if your intention was simply to invest in I bonds to get the highest possible interest rates at the time,
Suze: and you're really not interested in locking your money up with penalties for another five years. You're not interested in locking up your money where you cannot touch it at all for one year, which is what would be true. If you bought new ones with the money from your old ones, then you could redeem what you have right now, pay the taxes and penalties on it right now,
Suze: but possibly take that money and buy certificates of deposit with it buy treasury notes or bonds with it or something else, you only redeem if you have a 0% fixed rate
Suze: and your intention is that you want to hold I bonds for the long term and you want to take advantage of the 1.3% fixed rate
Suze: and therefore I would do it,
KT: Suze question number seven.
Suze: KT. Did that make sense to you?
KT: It did because wait, listen to question seven. If I redeem my I bond I bought that has 0% fixed rate and I buy a new one with the 1.3 fixed rate. Do you know about how long it will take to make the three month interest penalty back?
Suze: Assuming you have to be careful now when you redeem
Suze: and you should only be redeeming when you have held your 0% bond long enough so that your renewal interest rate is in the 3.94% one which is what it is right now. And that's what you've been renewed at.
Suze: And you have to hold that for three months. If you do that, then your penalty to redeem is only going to be 0.985%.
Suze: If that's true. If you compare that penalty of 0.985% to the 1.3% that you're gonna pick up, it's gonna be about seven or eight months till you have recaptured that penalty. So, is that a good thing to do? It is? So you can't like, but you have to know
Suze: what percentage of your penalty are you going to pay?
KT: And you look at these things November 1st and May 1st every year, every six months.
Suze: But people KT didn't necessarily buy in May and November maybe they bought in December, January, February, March, April
Suze: to get that other rate and now their six months from that time isn't up in May when the new one is. It's, you see, so very careful everybody. You wanna make sure that you're at the lowest possible interest rate, forget the fixed rate because it doesn't play in this. You wanna know
Suze: that your variable rate is the lowest it could possibly be. And you have been getting that low rate for at least three months because if you haven't, they're gonna ding you for the three month interest penalty of the higher interest rate before it changed. Remember, it's the last three months of interest. So just because it's at a lower interest rate for you right now,
Suze: doesn't mean that you've been getting that lower interest rate. So be careful, you want to have it, you know, for at least three months where you have been earning it.
KT: So here's number eight, Suze, would you wait till next year to purchase these new I bonds,
KT: if at all, I have $10,000 to invest.
Suze: Again, and I'm reiterating this, I'm sorry, KT, if I keep saying it because these questions, if you, if your intention is to have inflation protection,
Suze: if your intention is to not really sell these, it's to keep them and have that as part of your fixed income portfolio. Why wait till next year, right? The important part really is that this is something that you want to invest in. Just that simple. Why wait, you might as well do it now the other thing you could do
Suze: just if you want to see if all you have is $10,000 that you're ever gonna be able to invest in this. And you wanna see what happens with inflation next year, maybe. Where is the fixed interest rate going to be next year? Why not do 5000 this year and 5000 next year? Then either way you'll be fine
Suze: but you have until the end of April to take advantage of the 1.3% fixed rate. All right, KT.
KT: So number nine,
Suze: Are we almost done?
KT: Well, it gets a little more confusing. Number nine, if I redeem and buy a new, I since taxes in an Ibonds are tax deferred like an IRA,
KT: Suze. Will I owe income tax on my interest or is it like an Ira rollover?
Suze: So many people have asked me that question.
KT: I, I don't know how to answer that.
Suze: Of course not. No, it is not like an IRA rollover when you redeem a Series I bond or any part of a Series I bond.
Suze: And you haven't been paying the taxes on the interest annually, which most of you have not. The interest is tax deferred. When you go to redeem it,
Suze: you are going to pay a three month interest penalty if you're redeeming it within year two and five and you will pay ordinary income taxes on it no matter when you redeem it.
KT: Ready for this one. This is about the clocks again, Suze. If I redeem my I bond and buy a new one, does the time clock start all over again? And if it does, is it worth it?
Suze: The time clock? remember when you buy an I bond , you cannot touch it in year one, the 1st 12 months, no matter what
Suze: years, 2, 3, 4 and five, there is a three month interest penalty. After five years, you can redeem any amount of money from your I bond with no penalty whatsoever. However,
Suze: if you redeem an I bond now and you take that money and buy a new one with it. Absolutely. The time clock starts all over again. So if you're in the third year or the fourth year of your I bond already, because I've been telling you to buy I bonds for a long time.
Suze: I haven't recently told you to buy them, but for a long time, a while ago, you have to judge, is it worth it to start the time clock all over again? Because you are possibly one or two years away from there not being any penalty whatsoever to take out
Suze: that money once you hit five years.
KT: So you have, so the first year you can't touch it, you're two through five, you can touch it and you get a three month penalty after year five, you're scot free baby.
Suze: So you have to decide, is it worth it? Or not because let's just say interest rates skyrocket on us
Suze: and maybe inflation doesn't necessarily.
Suze: And now you want to take advantage of, you know what? I don't want the I bond anymore. I wanna lock in a 10 year treasury note or a two year certificate of deposit or whatever it may be. Do you want to be in a situation where you can get at your money without any penalty? Probably.
KT: Ok, we're almost to the end of these questions
KT: and I hope this is helping everyone. I'm still a little confused, but I have much more clarity as to what to do and what not to do.
KT: Who does?
KT: I do,
Suze: KT How much do you wanna bet me if I go back and ask you all,
KT: Just ask me anything right now, ask me any question. So number 11,
Suze: But trust me when this podcast is over, I am going to grill her.
KT: She does. All right. Number 11, I'm going to redeem my I bond to buy a new one. I was told I should only redeem on the second of the month
KT: and wait to buy the new one till the end of the month. Why?
Suze: Now this is a tricky one. You have to know that whenever you redeem an I bond in a month, you don't get interest. So if the I bond was sitting there all the way to the 25th and you decided to redeem it, you wouldn't have made any interest for all those 25 days. So you have to know because your interest
Suze: is credited on the very first of the month. You want to make sure that you get that interest. So I personally would wait till the second of the month, whatever month you're redeeming to redeem and take out the money I want.
Suze: In terms of purchasing an I bond, you would want to wait till almost the end of the month because what's so strange if you bought it on, let's say the 25th, you would be credited as if you had purchased it on the very first of the month. So you get a whole month free of interest, so to speak.
Suze: So you redeem on the second of the month, you purchase an I bond towards the very end of the month.
KT: So sell in the beginning and by at the end.
Suze: So for those of you who are redeeming your I bonds to take advantage of the 1.3% fixed rate, redeem them on about the second of the month
Suze: and then put the money in a money market fund for like, you know, 20 days, earn interest there. And then what you can do is take the money and buy your series I bond for the 1.3 fixed rate at like the 26th or 27th. Unless it's the month of February, then do it earlier
Suze: and then you'll be credited interest from the very beginning of that month. That's what you should do.
KT: OK. So here's what I need you to do to wrap this up for everyone.
KT: All these questions, you know that everyone goes to Treasury Direct, which is a little bit difficult to, to kind of navigate and figure out where can everyone go to get the answers again? Or the clarity from all these questions we just reviewed?
KT: How can they, how can they get a simple direct answer?
Suze: And one that's always there for you because the last thing I want to be doing, everybody is spending every podcast on how I bonds work. But there are people out there that devote their entire,
Suze: you know, channel that they tell you everything on whether it's youtube or blogs or whatever. That's all about I bonds.
KT: Do you have a favorite.
Suze: I, I think I do actually.
KT: What is it?
Suze: I'll get there in one second. The reason that it's so complicated KT when you go to Treasury Direct
Suze: is when you look up the value of your I bonds, they always subtract three months of interest as if you had already gotten the three month interest penalty. So you don't really know the amount of money that you have in there.
Suze: Now, one of my absolute favorite sites and I've learned a lot from this gentleman. He has no idea I read him, but I do all the time. His name is David Enna and he has a website or a blog that's on tip watch dot com. That's T IP watch dot com.
Suze: And it was his columns, KT, that I would read most of the time or all the time where I learned about a website
Suze: that was created by a man by the name of Bob Hinckley.
Suze: That's Eyebonds...E-Y-E-Bonds dot inf
Suze: that if you go there, everybody and you push the little square that says I bonds and then you look at the bottom of what comes up and you put the amount that you invested
Suze: and you go to the left hand side and just put the month that and year that you bought it, it will tell you exactly how much you have in there. Exactly how much you have earned every single time. I think it's fabulous. I bonds. E-y-e-b-o-n-d-s dot Inf.
Suze: And again, it's tip watch dot com. You go to tip watch. He has a frequently asked questions, he tells you everything and a lot of you need to read this a lot of times when it's a video or even a podcast or whatever, it can get confusing when it's something that you can print out and it's written for you and it was written as a blog.
Suze: It's really far easier to understand. So, KT, really, that's where everybody should go.
KT: I hope this clarifies... do you want to test me?
KT: Wanna give me a test? Just give me a test.
Suze: I have an I bond that's paying
Suze: 6% that I bought 6.38%. Alright. And it's at a 0% interest rate
Suze: and I bought it maybe a year or so ago. Should I redeem it for the new ones?
KT: I would hold in? Because you bought it about a year... (wrong answer noise)
Suze: All right, everybody. So until Sunday school, which will be Suze School. Ok. It's just that easier. Why do we want everybody to know Miss Travis?
KT: Wherever I go, I'll create a more peaceful, joyful, loving world and learn everything I need to know about eye bombs. And if you do that you will be unstoppable.