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Time to Cash in Your I Bonds?

When inflation was peaking during 2022 and interest rates were still relatively low, Series I bonds became incredibly popular. I bonds were yielding nearly 10% and were one of my favorite options for savers and investors. But with inflation rates dropping and treasury yields rising, you may be wondering if it’s time to cash in your I Bonds and look for other opportunities. In this blog post, I’ll review what I bonds are, how they work, and how to decide if selling them is the right decision in today’s rate environment. 

I Bond Basics

Series I Bonds are inflation-protected bonds issued by the US Treasury Department. They have a number of attractive features, such as: 

  • They pay interest primarily based on the prevailing inflation rate
  • They are backed by the full faith and credit of the U.S. Government, meaning they are as close to a risk-free investment as one can get.
  • They are tax-deferred, meaning you don’t have to pay federal income tax on the interest until you redeem them or they mature.
  • They are exempt from state and local taxes, meaning you don’t have to pay any taxes on the interest at the state or local level.

You can purchase I bonds through the website. You can buy up to $10K per person per year (plus an additional $5K of paper I Bonds through your tax return).

I Bond Interest Rate

The interest on I bonds comes from two components:

  • Fixed Rate – This is the rate that is set when you buy the bond. It never changes for the life of the bond. The fixed rate is usually low compared to other investments. For example, the fixed rate for I Bonds issued in May 2023 was 0.90%.
  • Inflation Rate -This is the rate that is based on the Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy. The inflation rate changes every six months. For example, the inflation rate for I Bonds issued in May 2023 was 3.38%.

The following table shows the fixed rate component in recent years: 

Here’s a look at the inflation rate component: 

The total return on I Bonds is the sum of the fixed rate and the inflation rate. For example, the total return for I Bonds issued in May 2023 was 4.28% (0.90% + 3.38%). If your bond was issued in May 2022, then your rate in May 2023 became 3.38% (0.00% + 3.38%). 

Should I Sell My I Bonds? 

I bonds most recent inflation rate came in at only 3.38%. This is significantly lower than the rates investors can earn on treasury securities. The table below shows the rate on various treasury securities as of July 2023: 

Given that investors can earn a higher rate in other government securities, it makes sense to question whether one should cash in their I bonds today. Given that most investors bought I bonds when the fixed rate was 0, the additional yield one can get by moving into other treasury securities is significant. 

Before you rush to sell your I bonds I would take a couple of things into account. First, you can’t sell an I bond within the first year of purchase. If you sell before 5 years of ownership, you have to give up 3 months of interest. Secondly, if you’re in that 5-year window and you sell today you’ll be giving up some of that 6.48% interest. It’s more advantageous to wait until your bond has been at the new 3.38% inflation rate for at least 3 months. Finally, if you sell your I bonds it means you will realize all the deferred gains for tax purposes.

For those worried about inflation, it might be worth holding onto your I bonds even if it means losing out on some interest in the short run. Because of the $10K limit on I bond purchases in any given year, it’s hard to get money into the bonds. If you cash out now and inflation does pick back up, you will only be able to put a limited amount back into the securities. 

Personally, I’m keeping the I bonds I purchased for now. My fixed rate is 0 and my inflation rate will reset to 3.38% in October. The earliest I will sell my bonds would thus be January 2024 when I’m no longer losing any of the 6.48% rate. If the new inflation rate announced in November remains significantly below treasury bills, I will likely redeem my bonds at that time. 

If you need help with making this decision or managing your portfolio, contact me today for a free consultation. 

Scott Caufield, CFA, CPA