(This article was updated 5/1/23 from its original version to reflect the change made to the fixed rate component from 0.4% to 0.9%. Further information about this change can be found here.)
We first wrote about I bonds in June 2022 (“Everyone’s talking about I Bonds”) because the 9.62% rate then in effect garnered a lot of interest and headlines. Now that inflation has come down significantly, the rate on I bonds is set to drop from its current 6.89% to 4.3%, a 38% decline. So, the question begs, are I bonds still a good place for savings? (If you need a refresher on how I bonds operate, including their restrictions and limitations, we suggest you read our original I bonds post first.)
I bond rates
Here’s a look at what I bond rates were paying for the most recent six-month periods:
Rate Period | Rate |
November 1, 2021 to April 30, 2022 | 7.12% |
May 1, 2022 to October 31, 2022 | 9.62% |
November 1, 2022 to April 30, 2023 | 6.89% |
May 1, 2023 to October 31, 2023 | 4.30% |
The current rate on I bonds, good through April 30th, is 6.89%. This means that if you buy I bonds on or before April 30th, you will receive the 6.89% rate for six months. On May 1st, the rate will drop to 4.30% for new purchases and for owners whose six-month holding period on existing I bonds has run out. As a reminder, the rate on your specific I bonds changes six months from the issue date of your bonds, even if that is after May 1st.
Should you cash them out, and if so, when?
The decision to sell or keep your I bonds is one of personal preference and should reflect the original purpose for buying them. If this was cash pulled from a bank account seeking a higher rate of interest, then maybe the 4.30% is still attractive to you. Maybe this was a way of diversifying your cash holdings or maybe there was a specific goal attached to this money, such as paying for a child’s or grandchild’s college education. Depending on your reasons for buying them in the first place will largely dictate whether you keep them or not.
Importantly, if you decide to sell the I bonds before you’ve owned them at least five years you will be penalized three months interest. As a result, I would suggest waiting at least three months after the new rate goes into effect on your I bonds. Waiting the extra three months will ensure you give up the lower interest rate income and not the higher rate of income.
Imagine a fictitious person named Bob bought some I bonds in December 2021 and January 2022. If Bob wanted to sell his I bonds, he should wait until September and October 2023, respectively, to do so. This gets Bob the full six months of the higher rate (6.89%) plus three months at the lower rate (4.30%). Since Bob hasn’t owned his I bonds for more than five years, he will be penalized the last three months of interest, but by waiting an extra three months, he will give up interest earned at the new lower rate. And since I bonds don’t credit interest until the end of the month, Bob should plan to sell them at the beginning of the month.
(On the TreasuryDirect website, the balance shown for your I bonds nets out the three months interest you would owe if you sold them before the five-year holding period is satisfied.)
How are you taxed on the gain in your I bonds?
Interest income is taxed at ordinary income tax rates and reported on Form 1099-INT. There is no special federal tax rate for I bonds like there is for qualified dividends, however, there are some tax-advantaged uses for I bond proceeds. If you utilize the proceeds to pay certain higher education expenses, you may avoid federal income taxes. Limitations apply, including income-related, so please consult the TreasuryDirect website or your accountant first. For all I bonds investors, interest income is tax-free at the state and local levels.
In closing…
With rates coming down significantly on new I bonds purchased after May 1st, they’re less attractive than they were 12-18 months ago. And for existing I bond holders, your current rate of 6.89% will be reduced to 4.30% after your six-month holding period expires. Whether or not to sell comes down to the reason you purchased them in the first place. If this money came from a bank account that is still earning less than 4.30% it might make sense to continue owning the I bonds. Your cash needs, risk tolerance, and overall financial situation will also play into your decision. Please reach out to us if you have any questions on this topic.
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