To clarify, the I bond interest rate changes every 6 months, and you must keep the bond for 5 years or forfeit 3 months of the interest. So, for example, assume that you buy a $10,000 I bond in January that pays 7 percent, and the interest rate stays the same for one year, and then you cash in the bond. Note that the interest is compounded semi-annually. You will receive about $10,534 for the bond, of which $534 is taxable income at your ordinary income tax rate. So, the actual interest rate you receive is about 5.34 percent before taxes because you forfeit 3 months of the interest. In order to receive the entire 7 percent first year interest rate, you would need to keep the bond for at least 5 years. The interest rate for years 2 through 5 is unknown because it changes every 6 months. Just doing the math.
|