I Bonds remain attractive, but when and why?
By David Enna, Tipswatch.com
The I Bond’s new fixed rate of 1.3% — the highest in 16+ years — and the resulting composite rate of 5.27% should be creating a lot of investor interest over the next six months.
But maybe not, since this is the first time in “seems like forever” that there are a lot of very strong competitors to I Bonds — nominal Treasurys, money-market accounts, bank CDS and most notably Treasury Inflation-Protected Securities, with real yields of 2.17%+ across the maturity spectrum.
Still, there are many good reasons to invest in 1.3%-fixed-rate I Bonds through April 2024, and some reasons not to. My article on the new fixed rate generated 72 comments and climbing. Lots of opinions. Let’s discuss.
1. Short-term investors should stay away.
I am defining a short-term investor as someone looking to redeem after 12 to 18 months. The short-term play became huge last year when the I Bond was paying 9.62% annualized for six months and then 6.48% for six months. Investors poured in, causing TreasuryDirect to crash in late October 2022. At the time, a 1-year T-bill was paying about 4.5%, a much lower yield.
Today, even though an I Bond has a much more attractive fixed rate — 1.3% versus 0.0% — and a decent composite rate of 5.27%, I Bonds aren’t competitive with other safe short-term investments. First of all, that 5.27% yield lasts for only six months (the other six months are uncertain) and anyone redeeming after 12 months will lose 3 months of interest. So the resulting annual return — after the penalty — could be something like 3.7% to 4.0%.
Check the best-in-nation competition (with no withdrawal penalties):
- 1-year bank CD: about 5.75%
- Vanguard Treasury Money Market, VUSXX: 5.32%
- 1-year Treasury bill: 5.29%
- High-yield savings account: 5.25%
Short-term investors are looking for a good nominal return over the next 12 to 15 months. Inflation protection isn’t really a factor and so I Bonds aren’t the best investment for this purpose.
2. For long-term holders, I Bonds remain attractive.
The 1.3% fixed rate is something I Bond investors have been dreaming about for more than a decade, after accepting fixed rates of 0.2% or lower from May 2010 to November 2017. It’s true that TIPS have a higher real yield, but are also a more complex, market-shifting investment. I Bonds have many pluses for investors:
- First, I Bonds are probably the most conservative and most safe of all investments. Your principal will never decline, ever. If inflation falls to below zero, the inflation-adjusted rate will fall to zero, but not below zero.
- I Bonds protect you against unexpected inflation. If inflation in the next 30 years suddenly returns to 9%, your principal will increase by that amount because of the inflation-adjusted interest rate.
- I Bonds offer superior deflation protection versus TIPS, since the I Bond’s composite rate can never fall below 0.0%. So I Bonds lose no value during a deflationary stretch — unlike TIPS — and then get the full benefit of inflation rising from deflation.
- I Bonds have a flexible maturity. You can redeem them after one year, costing you three months of interest. Or redeem them after five years and pay no penalty, or just hold them for 30 years and cash out.
- I Bonds work like a stealth traditional IRA, allowing you to defer federal income taxes until you redeem them, so you pay zero in taxes until they are sold. This is a big advantage over TIPS. In addition, I Bond interest is always free of state income taxes, which isn’t true for TIPS held in a traditional IRA.
- I Bonds are simple to track as an investment. Use the web-based Savings Bond Calculator, update your information, and check it a couple times a year. Or use a site like EyeBonds.info to track current composite rates and principal balances.
So it is reasonable that a TIPS has a real yield advantage over an I Bond, given that its value shifts with market forces every day. I Bonds with a fixed rate of 1.3% are attractive.
3. Haven’t bought your full 2023 allocation yet? Do that by late December.
I am jealous. You are a patient and wise investor. The Treasury limits electronic I Bond purchases to $10,000 per person (or entity) per year, plus the possibility of $5,000 in paper I Bonds in lieu of a federal tax refund.
So, if you consider yourself an I Bond investor and you haven’t bought a full 2023 allocation, you should do that in late November (maybe Nov. 28) or late December (maybe Dec. 27). Never wait until the very last day of the month. Make sure to allow one — or better yet two — business days for TreasuryDirect to complete the purchase. You can schedule the exact purchase date inside the TreasuryDirect system.
It’s important to do this before the end of December because the $10,000 purchase limit for 2023 will switch to 2024 on January 1. If you make the purchase before the end of December, you can then make another full $10,000 purchase anytime in 2024.
4. DO NOT make gift-box purchases in 2023.
The Savings Bond Gift Box is a way of extending your purchases beyond the $10,000 limit by doing a swap with a trusted partner for delivery in a future year. Once you make the purchase, the I Bond begins earning interest just like any other I Bond. And you can make multiple sets of $10,000 purchases. But those I Bonds are no longer yours — they belong to the person getting the future gift.
Harry Sit of the TheFinanceBuff.com was the first to write about this strategy in December 2021, in an article titled “Buy I Bonds as a Gift: What Works and What Doesn’t.” When people ask me about the gift box, I point them to this article, which was well researched and thorough.
I have never used the gift-box strategy, because I thought it should be reserved for times when the I Bond’s permanent fixed rate is very high (not when the temporary variable rate is high).
So now is the time, with the fixed rate at 1.3? No, not exactly.
Anyone purchasing a traditional or gift-box I Bond through April 2024 is going to receive exactly the same return — a fixed rate of 1.3% and composite rate of 5.27% — for a full six months. So there is no reason to purchase this “extra allocation” in 2023, you can wait until after April 10, 2024, when the March 2024 inflation report is released. At that point you will know the I Bond’s new variable rate — to be reset May 1 — and have a better idea of the potential new fixed rate.
It makes no sense to rush a gift-box purchase. You have time.
5. Wait until at least April 2024 to purchase your 2024 allocation.
Again, no reason to rush this purchase. On April 10 you will know the I Bond’s next variable rate and we can speculate on the potential new fixed rate.
If real yields have risen dramatically by April, you might want to hold off on a purchase until after May 1 or even as late as mid-October, when we’ll know the variable rate to be reset on November 1.
If real yields have fallen dramatically by April, you’d want to purchase in late April to lock in that 1.3% fixed rate for the I Bond’s full term. And you also might want to consider gift-box purchases.
I won’t criticize people who buy I Bonds every January, no matter the fixed rate. That is a dedicated strategy. But for most people, waiting until at least mid-April will be the wisest move. And remember, in the meantime you can probably earn 5.0%+ on your cash.
6. Rolling over 0.0% I Bonds does make sense.
If you are holding I Bonds with 0.0% fixed rate — especially those held for five years or more — you can consider redeeming those older I Bonds for new ones with the 1.3% fixed rate. When you redeem, you will owe federal taxes on the interest earned.
If you are planning to redeem I Bonds held for less than five years, read this first: “The I Bond exit ramp is now open; proceed with caution“.
I think this is a sound strategy, especially if you don’t want to raise another $20,000 to buy I Bonds this year or next in two separate accounts.
7. I Bonds and TIPS are compatible investments
Anyone building a ladder of TIPS to provide reliable, inflation-protected money for retirement knows there is one sticky problem: There are no TIPS that mature in the years 2034 to 2039. I Bonds can be used to supplement your TIPS ladder, especially if you have a sizable allocation. I Bonds could fund your spending needs through those “gap” years.
Also, a ladder of maturing TIPS is a solid source of predictable future inflation-protected cash, but it won’t work well to meet “surprise” spending needs. Because of their flexible maturity and constant value, I Bonds are the best choice for your back-up emergency fund.
8. Don’t dump all your I Bond holdings
I have seen several comments from readers who plan to redeem almost all their I Bonds to purchase short-term Treasurys, which currently have a yield advantage. I am not a fan of this strategy. I Bonds held at least 5 years create an inflation-protected “savings account” that can be easily accessed, faces no reinvestment risk, and can never go down in value.
Why did you buy I Bonds in the first place? Probably for the inflation protection, safety and stability. I’d say all three of those factors — especially the inflation protection — are as important as ever right now.
My usual advice for years has been “don’t redeem I Bonds until you need the money.” That doesn’t mean holding to the 30-year maturity. It means using your I Bond holdings as a reserve cash account, to be used as needed.
So yes, I will probably redeem one set of 0.0% I Bonds to lock in the new 1.3% fixed rate in 2024, and possibly one more set for gift-box purchases. Otherwise, I will be holding all my stash of I Bonds.
Are you losing passion for I Bonds? Remember this: If we ever get to a period again of Federal Reserve intervention and ultra-low interest rates, an I Bond with a fixed rate of even 0.0% will continue to match inflation with zero chance of a loss.
• Confused by I Bonds? Read my Q&A on I Bonds
• Let’s ‘try’ to clarify how an I Bond’s interest is calculated
• Inflation and I Bonds: Track the variable rate changes
• I Bonds: Here’s a simple way to track current value
• I Bond Manifesto: How this investment can work as an emergency fund
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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
Given recent inflation data it seems like the current ibond will indeed be the best for a while. I intend to “stock up” via purchase and gift box in April ’24 but in case you’re not aware, you can use up to $5K from your tax refund to purchase paper bonds in addition to the $10k limit. Then, there’s a fairly straightforward way to convert them to electronic bonds at TreasuryDirect.
Pingback: Time to Redeem Older Savings I Bonds With Zero or Low Fixed Rates? — My Money Blog
For the I Bond fixed rate to increase next April we probably need a perfect storm of
1. Real rates staying above 2% through april (the trends in the last couple of weeks not encouraging)
2. Inflation coming in lower (preferably 3 or below)
Otherwise 1.3% is as high as it gets for a while
I agree, except that we’ve seen some amazing (and unexpected) shifts in real yields over the last year. Anything is possible.
Hi David, You write above “If you are holding | Bonds with 0.0% fixed rate – especially those held for five years or more – you can consider redeeming those older I Bonds for new ones with the 1.3% fixed rate.”
In looking at each of my I bonds on treasury direct, I see original purchase amount, current value, and the total interest rate. I tried clicking the individual “Confirm #,” and the same combined interest rate appears for the individual security.
How do I see the fixed interest rate for each of my I bonds?
Thanks!
I don’t believe there is a way in that TreasuryDirect list to see the original fixed rate. It only shows the current composite rate. This can make it “iffy” when you go to redeem; you probably want to redeem only the 0.0% fixed rates. If you remember the month and year of purchase, you can easily check eyebonds.info to see the fixed rate and current composite rate. I Bonds that are currently paying 3.38% or 3.94% in the TreasuryDirect listing are ones with a 0.0% fixed rate.
Thanks David. As always, most appreciated.
There is a list of all of the I-Bond fixed rates maintained on Treasury Direct at https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/. I find the PDF version of their list cumbersome and prefer the simple scrolling list on that page. The issue dates for the I-Bonds held in your Treasury Direct account are, of course, listed in the details of your account Current Holdings for your bonds.
I use this. Simple to look up your rate based on the month/year.
Click to access i-bond-rate-chart.pdf
This is a decent resource: https://eyebonds.info/ibonds/home1000.html
It struck me while pursuing the idea of selling my 0.0% fixed rates I bonds to fund my 2024 $10k purchase – what am I thinking???
My intent has been to purchase the allowable amount of I bonds each year (that I could afford) in order to build-up safe, inflation protected savings for retirement.
Why would I delete one of my prior year’s (hard earned savings) I bond purchases, pay tax on the earnings, simply to earn an additional 1.3%?
The underlying goal has been purchasing power preservation, and each yearly allotment increases the safety of my retirement savings.
Thoughts?
Why? Maybe because at 1.3% you will be getting 50% more than inflation if/when it returns to 2%. Also, at 0.0% fixed you are loosing to inflation once you pay the tax on the gain, but at 1.3% fixed you will likely cover all of the tax on the gain and have a surplus gain over inflation.
If you’re looking to accumulate inflation-protected reserves, then any selling activity decreases your holdings. For that case, ideally you’d buy the new issues but not sell the old ones. Or, if you have sufficient liquidity with your existing holdings, redeem the 0% I-Bonds and use the proceeds to buy TIPS that you’d hold to maturity.
I am considering using the zero percent certificate of indebtedness feature to increase the fixed rates on some savings bonds. Possibly cashing out exactly 10,000.00 and then being left with a partial bond, and then using the C of I funds to buy the new 10,000 bond with a higher fixed rate. Do you have any experience with that feature or have older posts about it? Or is it better to move the money back and forth from a bank.
I use the 0% C of I primarily for extremely short term or small amount holdings. Otherwise I prefer to use a higher interest bank account as my cashing out destination and new purchase source to keep earning in between if possible. But this would also depend on the number of savings withdrawals in the current month due to banking law restrictions. When cashing out, don’t forget about the federal income tax you may owe on it since that may affect how much you wish to leave behind.
I would never use the 0% C of I for anything, since that money is tied up and only available to use for purchasing Treasuries. (To me, it’s like a gift card that can only be used at one store.) It’s super easy to transfer between TD and your bank, and I’ve never had an issue with that. Harry Sit has a blog post advising against using 0% C of I, but it is based on one very bad experience, which I would expect to be uncommon.
https://thefinancebuff.com/treasurydirect-zero-percent-c-of-i.html
@Arthur McBride Could you please explain what you mean by using the 0% C of I “to increase the fixed rates on some savings bonds”? Does using C of I somehow enhance the interest rate on a new savings bond purchased from TD? I thought the C of I was just a place to make short-term interest-free loans to the Treasury.
I can’t speak for Arthur, but I think he was just proposing using the C of I as a step in a process to roll over 0.0% I Bonds to ones with a higher fixed rate. I’ve never used it; I just have proceeds delivered to my brokerage account. Since it doesn’t pay interest, you don’t want money sitting there for long.
I’ve used the C of I several times without problem but as noted by others it is only for very short term use. TreasuryDirect personnel advised me that maturing securities are deposited to the C of I prior to processing of new purchases/withdrawals. I’ve monitored my account in the wee hours and found marketables to typically be deposited at 0300 EST with purchases pulled around 0500. A situation where the C of I is ideal is funding an I-bond with a TreasuryDirect-held T-bill or T-note maturing at the very end of the month. Due to family beneficiary issues, we found it best to date to use TreasuryDirect to hold certain marketables that we intend to hold until maturity. The remainder are in taxable and Roth brokerage accounts.
I think I will continue my strategy of redeeming seasoned I Bonds (beyond the five years), and buying at the end of January just to start my lock-up period a few months early. With both a personal and sole proprietorship account, as well as tax refunds, I can put $25,000 a year in I Bonds and I think $125k at any one time in safe money not subject to any risk save for the three month penalty and/or waiting until a full year has past, is more than adequate for my needs.
David, I appreciate your simple, logical explanations that include not just the financial math but the strategic implications. Thank you!
I’m a relative newcomer that started as a short-term I-bond investor. The combined rates in 2023 didn’t enticed me to buy, so I put my available cash elsewhere. But the new 1.3% fixed rate looks appealing for the long term.
I’m thinking I’ll convert my short-term I-bond decision into a long-term one. For my April 2022 purchase, I’ll sell in December 2023 (one month ahead of your optimal Jan 1, 2024 date) and roll into 1.3% fixed rate I-bonds before the end of 2023. I’ll then follow your suggestion to make a 2024 I-bond decision in April when more information is available.
If you have another source to fund a December purchase, I’d recommend considering tapping other cash for the purchase and redeeming your April 2022 bond in January to replenish the funds used for the December purchase. You’d be forfeiting a month of 6.48% yield if you redeem in December instead of January. Also, consider that you can make your December purchase at the end of the month and then redeem your existing I-Bond at the beginning of January. If you have another source to pull the cash from (which I know is a big IF), you’d only need that cash for the new purchase about a week before you get funds from redemption in January.
Unless you want to pull the earnings into 2023 for tax purposes, you’ll likely come out a little ahead by buying in December and redeeming in January.
Thanks for all the great information, David. When mentioning CDs, MYGAs should also be included, especially being they pay a higher rate and are also safe.
TIPs have both duration and deflation risk if you are a forced seller before maturity. IBonds have no duration risk (just a 3 month interest penalty if held less than 5 yrs) and only have deflation risk limited to the fixed rate (i.e. deflation can only zero out the fixed rate but never make it negative).
An IBond is a strange investment that can make you money in both an inflationary and deflationary environment.
I have come to regret using the gift box strategy to lock in an extra $10k of ~9% I-bonds a couple of years ago. Transferring the gift box purchase to a regular I-bond now means I need to pick a year to be ineligible to buy my regular I-bond purchases. And with I-bond fixed rates going up, there’s never an ideal time to do that.
Just buy another gift and you can do both! 😃
Deferring payment of taxes on the accumulating interest is great, but is optional. Paying taxes each year may be beneficial for some people: those who are in a low marginal federal tax bracket and expect to be in a higher bracket later or those who may be subject to higher income tax on social security or higher IRMAA based on the total interest payment. All this supposes a magical crystal ball to predict one’s financial situation 30 years down the road!
I don’t think a lot of people do this, because it is a bit of an accounting nightmare. I believe you will have to track all your annual payments because TreasuryDirect will show you owe the full tax after redemption. However, there are times this really does make sense, such as I Bonds in a child’s account where there would be zero tax owed if paid yearly, because that child has no annual income. (But I’m not exactly sure how this works under TreasuryDirect’s custodial account policies.)
Also, isn’t opting for the accrual method a lifetime requirement. I am not sure if it is for all savings bonds or individual bonds, but I am thinking it would be for all savings bonds going forward for life.
Per my research the election to change to the accrual method applies to all savings bonds held for the entire tax year and future acquisitions. However, it is possible to revert to the cash method upon request to the IRS.
https://www.thetaxadviser.com/issues/2022/dec/tax-planning-for-bond-transactions.html
The Embedded Put on Savings Bonds is rarely considered properly …. the idea that you “cannot lose money” is a good layperson equivalence. Traditional Bonds (Un-putted) lose value w/rising I-rates. Search Bogleheads for more info but don’t expect a conclusion! 🙂
The intuition here is correct; I-Bonds mixed with higher-rate TIPS is fine.
On Bogleheads, you will see some people arguing that the fact that I Bonds don’t trade at market value is a *negative* — you can’t get a windfall from falling interest rates. I’m in the camp of *positive* because I have plenty of other investments that rise and fall with market trends.
My wife and I have been buying the maximum allotment of I Bonds each year. We also established “entity” accounts to further expand that dollar limit.
The 30-year maturity of an I Bond will cover the entire remainder of our statistical life expectancies. Therefore, we regard I Bonds as long-term inflation-indexed cash for spending at some yet-to-be-known time later in life, or (if unused) as inflation-indexed cash to be left to our beneficiary charities.
We didn’t like 0% fixed rates any more than anyone else did. However, we will not be redeeming our 0% fixed I Bonds, because we don’t view I Bonds as short-term trading vehicles to be dumped when a temporarily attractive “something else” comes along, e.g., new I Bonds with higher fixed rates, or nominal Treasuries with a higher–but potentially temporary–interest rate. Our goal for I Bonds is accumulation, i.e., to continually enlarge our holdings of them, and redeeming them before we need them would therefore impair the size of our total holdings, especially when we don’t need the redemption proceeds from past I Bond purchases in order to buy new ones.
It would be wonderful if Treasury policies allowed I Bond buyers to “back up the truck” and buy $XXX,XXX when the fixed rate seems really attractive, but that’s not the case. A finite amount is allowed each year, and it’s not possible to backfill a previous year which the person already redeemed, or in which the person never bought at all. Therefore, we buy but don’t redeem. If/when the time comes that we finally need to access the accrued inflation-adjusted cash in our I Bond holdings, then those 0% I Bonds will, of course, almost certainly be the first redeemed. But that time still lies in the future.
We understand the advantages of TIPS, but we are turned off by the disadvantages regarding taxation if held outside a retirement account; the fact that their accrued values go both up and down and the only return absolutely guaranteed over the full life of a TIPS is the return of its original par value at maturity; and the fact that they have a fluctuating market price and any sale before maturity can actually result in a net loss regardless of what is happening with “inflation.” I Bonds eliminate all those disadvantages. They’re not perfect, but they’re very good for a very specific purpose.
I am also inclined not to redeem the zeros.
Thanks to David for the reminder of the advantages of waiting until April for gift box purchases.
Maybe you can’t back up a truck, but you can back up an SUV and use the gifting strategy with your wife to accumulate fixed rate I Bonds to be delivered in future years and adds to your goal of accumulation while locking in the fixed rate.
In September, my wife and I redeemed $30K of 0% fixed rate I-bonds (purchased in Nov-21 and Jan-22, total taxable interest $3688) and will redeem another $40K in April 2024 (purchased in Oct-21, Apr-22, and Jan-23, total taxable interest $4648). We will put some of the proceeds (principal + interest) into short-term Treasuries that we can use for expenses, but will purchase $50K in I-Bonds (1.3% fixed rate) in April 24, with $10K for direct 2024 purchases and $40K as gifts deliverable in 2025 and 2026. The days of high variable rates are probably over. With our purchase in April 2024 ALL of our I-Bonds will have the current 1.3%… forever, or at least for the next 30 years. I-Bonds with a positive fixed rate will always outperform bonds with a 0% fixed rate.
In September you redeemed 30K of I bonds purchased in 11/21 and 1/22. No problem for the 11/21 I bond, but you lost 1 month of 6.48% for the 1/22 I bond you redeemed. Should have waited until October to redeem that one.
No. The variable rate on Jan-22 bonds was reset to 3.38% in July, so the three-month penalty for Jan-22 bonds sold in September was at that rate.
Correction to my original post: we redeemed the bonds in October, not September, so the three-month penalty was July, August, September.
I’m becoming very suspicious of the market / govt data releases. They keep timing it way too perfectly to ruin your investments.
I had stashed some cash in EE bonds (like a savings account) and wanted to convert those to 30 yr nominals in the upcoming auction, since the rates were trending to be higher than 5%. As always, the jobs data / fed comments / market sentiment / pick your convenient reason caused them to dip back down for all 3 auctions this week (3yr, 10yr, 30yr). Everything else except these 3 are above 5. ¯\_(ツ)_/¯
If you EE bonds, don’t forget the doubling period. It would make no sense to redeem them before they double in value since purchase.
True, but they were bought last year. I’m not losing a lot of interest. And so I’m swapping them with 30 yr nominals, where value should get preserved as long as rates don’t increase too much. At 20 yr double, it’s 3.5% yield. If I could snag 30 yr above 5%, then I’m ahead (and I earn good interest if I need to cash it before maturity).
In that case good move. I have seen good predictions that rates may have peaked, so that long term treasury might also give you capital appreciation as a bonus.
NJ is a state that has an exception of the taxability of TIRA distributions. See NJ Publication GIT-1 & 2, Retirement Income, page 9. Here the exception of the taxability of interest received from direct federal debt obligations is discussed.
“ In addition, I Bond interest is always free of state income taxes, which isn’t true for TIPS held in a traditional IRA.”. Why isn’t this true? Why would an investment in an IRA not enjoy tax deferral until withdrawal? And why wouldn’t TIPs get exemption from state taxes like other US treasury securities?
Distributions from traditional IRAs are subject to federal and state taxes.
Investments in a traditional IRA do get tax deferral until withdrawn, but when withdrawn the proceeds are taxed as regular income. It doesn’t matter the source of the withdrawal (Treasurys, stock funds, dividends, capital gains, etc). All withdrawals are all subject to federal and state income taxes.
And it would be an accounting nightmare to do otherwise!
“All withdrawals” from traditional IRAs subject to federal income taxation exclude QCDs (Qualified Charitable Distributions), which I understand are not taxed federally nor included in IRMAA calculations when made by IRA owners attaining a specified age. The rub, if there is one, is that the distribution proceeds must go to a charitable organization instead of one’s personal spending, but to the extent one makes charitable contributions anyway, it is a good alternative.
This is correct. QCDs do not raise taxable income, or apply to IRMAA limits.
I just read the three latest I-bond posts in succession. This one is especially useful in restating earlier comments as a round-up of action (and judicious inaction) items.
btw I am a near-newbie of the 9.62% cohort