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Interest Rate Savings Bonds

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Dora Said:

can someone tell me the tax rate I would have to pay on interest gained from a savings acount...Thanks?

We Answered:

It would whatever tax bracket you would fall into once your adjusted gross income is fully calculated. Interest earned from a savings account would be an addition to AGI. For example, if you file single, and your AGI is $50,000 you would be in the 17.4% tax bracket.

Warren Said:

What gives the best interest rate for savings? CD's, Mutual Funds, Bonds, Stocks?

We Answered:

It depends on when you need the money. For a down payment on a house, you should probably keep your money in a high yield savings account (I use HSBC and ING) or CDs. Your money won't grow as much but that's ok because you're saving your money for a short term goal. Not losing money is more important in this case.

But in the long term, like retirement or college savings it's more important that your money grow and you have more time to handle the ups and downs (short term money loss), so stocks and bonds are best.

Glenn Said:

Can anyone help with bonds interest rate?

We Answered:

You pay $50 now in exchange for getting $100 in 12 years. That is a zero-coupon bond, meaning there are no interest payments along the way.

$100 = $50 X (1+rate)^12

Now just plug that into Excel and use the solver function. The interest rate is 5.95%.

Carmen Said:

I own a few savings bonds. I bonds. Now a few of them have a interest rate of 0% could someone explain why?

We Answered:

"I" bonds are a particular type of US Savings bond in which the interest rate is tied to the rate of inflation. Because we had some deflation in the last period for which the govt calculates the inflation rate, the interest rate for the next period is zero. The good news is that the rate can't go below zero and that it's recalculated twice per year.

Debra Said:

Are there any indications that the interest rate of an I series savings bond will increase after April?

We Answered:

If you buy series I bonds at all, you should buy before the end of April. The Feds will reset the interest rates for new I bond purchases at the beginning of May. They change the rates every six months, in May and November. Whatever the rate is when you purchase is good for the first six months you own your I bonds. Enough is already known about how the new rate will be calculated to strongly suggest that it will be much lower than the current 3.36%.

As you indicate, I bond interest consists of two components - a fixed rate (currently 0.3%) and an inflation adjustment (currently 3.06%). To the best of my knowledge, the U.S. treasury doesn't publish how they set the fixed rate, but it rarely jumps around very much. You can realistically assume that the fixed rate that is announced at the beginning of May will be around 0.3%, plus or minus a couple tenths of a percent.

The big issue is the change in the inflation adjustment. The current 3.06% adjustment is based on the change in the Consumer Price Index between March, 2009 and September, 2009. The adjustment that will be announced in May will be based on the change in CPI from September, 2009 and March, 2010. The March, 2010 CPI has not yet been published, but the February CPI is known. If the inflation adjustment were based on the five month period between September, 2009 and February, 2010, it would be only 0.71%. Add that to a 0.3% fixed rate and I bonds will yield only about 1% interest if you wait until May to purchase. So unless the Feds are unusually generous in setting the fixed rate or there was a large jump in CPI in March, the I bond yield will decline by about two thirds in May.

You can determine the exact May inflation adjustment simply by waiting until the March CPI is published later this month. That will give you everything you need to know about the new I bond rate except for the uncertainty of how the Feds set the fixed rate.

I personally would not buy I bonds right now. Even purchased before the end of April, you will get only 3.36% for the first six months plus about 1% for the second six months. It adds up to about 2% for the first year. It's not bad compared with other safe investments, but I figure there are better uses for my money than earning 2%. Your Ad Here

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