How to calculate savings bonds’ new math

Without the inflation protection, I-Bonds aren’t suited to the classic long-term goals that have attracted people in the past, such as saving for retirement or grandchildren’s college educations.

But at 4.84 percent they could appeal to short-term investors who want to earn more than they can in other super-safe savings, such as federally insured bank certificates of deposit. Six-month CDs are paying around 2.75 percent, and five-year CDs just 3.5 percent.

Before plunging into I-Bonds, note that you cannot redeem one until you’ve owned it for at least 12 months. You would get the 4.84 percent annualized rate for six months, but for the following six months you’ll get the rate that will be set Nov. 1.

Also, if you redeem an I-Bond within five years of your purchase date, there is a penalty equal to the final three months’ interest earnings.

Imagine you bought an I-Bond today and the rate stayed the same on Nov 1. With the three-month penalty, you’d pocket around 3.6 percent over 12 months. With a 12-month CD you’d probably get around 3 percent.

Remember though that interest earnings on savings bonds, though exempt from state and local tax, are generally subject to federal income tax — though investors below certain income limits can get exemptions if earnings are used for education expenses. For details look at IRS Publication 970.

You can get I-Bonds for as little as $25. But an individual can buy only $5,000 worth of I-Bonds in a calendar year, or $10,000 if you buy half in electronic form and half in paper form.

I-Bonds are no good for people who need steady income, because you don’t get the interest earnings until a bond is redeemed. Taxes are owed only after redemption.

Many banks and credit unions sell I-Bonds, and they can be purchased directly from the government. The Web site carries lots of information.

A final note: The savings bond Web site compares I-Bonds to another government bond called Treasury Inflation-Protected Securities, or TIPS. Explaining TIPS would take another column, but for now be warned that they’re very, very different from savings bonds. Their value fluctuates with market conditions, so it’s possible to lose money — lots of money. With savings bonds, your principal is safe.

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