Currently, the inflation component has suddenly dropped to one percent, and I have not been able to find out the reason for this change. The May 2006 CPI published by the Department of Labor Department was a tad over 3 percent, and for the preceding six months was in the range of 3.4 percent. Would you please explain the apparent discrepancy? Is it possible that the Labor and Treasury departments use different statistics? --- F. J., by email from Wadsworth, OH
A. You'll be glad to know that the new rate, posted Nov. 1 and good for all bonds between now and May 1, is 3.10 percent, based on the annualized rate of inflation as measured by the CPI-U (Consumer Price Index for all Urban Consumers) as measured by the Department of Labor. Note that the Department of the Treasury uses the Department of Labor measure of inflation.
As a consequence, an I Savings Bond purchased between April 1 and Oct. 30 of this year will now earn a 1 percent fixed rate plus the 3.10 percent inflation rate, or 4.10 percent. A new I Savings Bond purchased in the current six-month earning period will be earning at a 1.4 percent fixed rate plus the 3.10 percent inflation rate, or 4.52 percent.
You can learn more about these bonds by visiting the savings bonds website at www.savingsbonds.gov/indiv/indiv.htm. The only thing constant with these bonds is their fixed earning rate, which is fixed at the period of purchase. That rate is what you will earn until the bonds mature, plus semi-annual adjustments for the rate of inflation.
Savvy investors who bought the first I Savings Bonds late in 1998, for instance, earn a whopping 3.30 percent fixed rate plus the inflation rate. Those bonds are now earning over 6 percent. Since November 2002, however, the fixed rate has ranged from a high of 1.6 percent to a low of 1 percent--- plus the rate of inflation.
The rate of inflation in the previous period was very low--- only 0.5 percent, annualized to 1 percent---due to declining energy prices. The rate in the preceding 6 month period had been very high due to rising energy prices.
Basically, you should pay attention to the fixed rate in the period of purchase and know that the bonds will eventually reflect the rise in the Consumer Price Index plus the fixed rate.
Q. I am in my early 70s, retired, receive Social Security, have Medicare, and receive a required minimum distribution from my 401k account. Working part-time, I generate some self-employment income. This income is subject to income tax. It also triggers tax on part of my Social Security earnings. And I pay the self-employment tax.
I do not have any business expenses to write off against the self-employment income. Do you have any suggestions for reducing some of this tax liability? ----J. C., by email
A. Welcome to the future! What you are experiencing will be the lot of all younger workers, because the formula that triggers taxation of Social Security benefits is one of two items in the entire tax code that is not indexed for inflation.
The other is the dreaded AMT, alternative minimum tax.
Sadly, there is not much you can do. Most of the cures are worse than the ailment.
One potential cure, conversion of your qualified plan assets to a Roth IRA, will penalize you for withdrawals from the new account in the first five years. That's not something a seventy-something wants to do.
Just remember that this miserable bit of complexity is a bipartisan achievement. A Republican president (Ronald Reagan) signed it into law and a Democratic president (Bill Clinton) turned it into a graduated tax. This tax is the main reason young middle-income earners who once expected to retire to a lower tax rate can now expect to retire to a higher tax rate.
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