What you Need to Know About your Current I Bonds

Inflation-adjusted Series I Savings Bonds backed by the U.S. government, known as I Bonds, have become attractive to many investors. These savings vehicles gained significant popularity in May of 2022 when the US Treasury was offering rates of 9.62%. The current I Bond yield, most recently adjusted in May of 2023, is 4.3%. Since these rates are tied to inflation, we have started to see the new 6-month interest rate offering come down as inflation is easing.  

Keep in mind that your I Bond interest rates are recalculated every six months, so you are not locked into the rate you received when you first purchased the I Bond. The I Bond interest rate is comprised of a fixed rate and an inflation-adjusted component. While the new rates are announced each May and November, it’s important to know that your interest rate changes every 6 months according to when you purchased your I Bond. You can use the following table from Treasury Direct to understand when your interest rate changes to the newly announced rate. 

Benefits of I Bonds 

Assuming you are comfortable with at least a 12-month holding period, I Bonds offer many tax benefits. While I Bonds are held, no federal taxes are due on the interest that compounds every six months. Instead, the interest is paid when the I Bonds are cashed out, with zero state or local taxes due. You actually have a choice to pay taxes on the accrued interest each year or wait to pay all of the taxes in the year that you cash out the bond. It’s completely up to you but most people don’t know this option exists, so they typically pay taxes at surrender. If you decide to hold your I Bond to maturity you can essentially defer taxes for up to 30 years with this investment! 

Another tax benefit of an I Bond is that you can skip taxes altogether if you use these funds to pay for higher education expenses. Of course, you must have earned income of less than $137,800 MFJ in 2023 to qualify for this exclusion. Additionally, you must cash the bond out in the same year you pay for the education expense.  

How to buy I Bonds 

I Bonds cannot be purchased by brokers or financial advisers on behalf of their clients, nor can they be purchased in retirement accounts such as Roth IRAs or 401(k)s. For those of you looking to buy I Bonds, you can purchase them electronically once you create an account on Treasury Direct. You can also elect to buy paper I Bonds with your tax refund if you have an extended return. You can only purchase $10,000 worth of I Bonds each calendar year. 

Evaluate your options  

I Bonds must be held for at least 12 months and can be held for as long as 30 years. It’s important to evaluate this investment after the first 12 months to determine if it’s still appropriate to hold. You should examine how the interest rate your I Bonds will receive over the next six months stacks up against other cash alternatives. At the time of this article, I Bonds are guaranteeing a 4.3% per year 6-month rate while high-yield online savings accounts are offering between 3.9-4.8% per year. Some money market funds pay between 4.25%-4.85% and short-term T-bills are yielding 4.7%-5.0%. All of this to say, it’s important to evaluate these holdings on a regular basis to make an appropriate determination to sell or hold your I Bonds. 

One important factor to consider is how much interest you may give up when you cash out your I Bond. If you cash out your I Bond after 12 months, but before holding it for a full 5-year period, you will forfeit the last 3 months of interest accrued.  

Should you invest more money in I Bonds, or is it time to look for other cash alternatives? 

Depending on your purchase date, we recommend that people hang on to their I Bonds for about 15 months. Let’s assume you purchased an I Bond on July 1, 2022. You would have earned 9.62% from 7/1/2022 – 1/1/2023 and then 6.89% from 1/1/2023 – 7/1/2023.  If you cash your I Bonds in at the 12-month mark, you will be forfeiting 3 months of your 6.48% interest rate. If you wait until the end of October, you will only be forfeiting your 4.3% interest that was accrued from 7/1/2023 – 10/1/2023 and can likely find other options at that point in time with higher rates of return. 

Given the constraints around I Bonds and the expectation that inflation will continue to trend lower, you will likely have more success using one of the three previously mentioned options for your short-term savings, emergency fund, and excess cash.  

Bottom Line 

I Bonds offered a terrific opportunity when inflation was rising. Now that we see inflation trending lower, I Bonds are still a safe investment, but far less attractive now than they were in 2021 and 2022.  

Andrew Comstock, CFA