Last year, financial geeks across the country squinted their eyes at the clunky TreasuryDirect website to purchase I savings bonds, which were a screaming deal at the time.
At one point last year, you could purchase an I bond that would yield 9.62 percent annual interest for a six-month period. When you consider that savings bonds are guaranteed by the federal government, are not subject to state income tax, and can grow tax deferred until redemption, it’s no wonder that hordes of investors scooped up savings bonds last year.
Now let’s consider the current investment landscape to determine whether it makes sense for you to hold on to your I bonds. While it’s true that some I bonds purchased earned high interest, that elevated payment was due to inflation that was particularly high during the later stages of the pandemic.
As you may remember, the “I” in I bonds refers to inflation adjusted. Every six months, the inflation adjustment changes based upon a specific federal inflation number. The other interest component of I bonds is the fixed rate that is set for the period that you purchased the bond.
To stay with the example of last year, if after May if you purchased an I bond, you earned 9.62 percent annualized interest over the first six months based on inflation and 0 percent based on the fixed rate of that bond. While that rate was certainly attractive, those same bonds purchased last year now earn a relatively paltry 3.38 percent annual interest. Two years ago this would be exceptional. Now you can earn more than that in a savings account or a federal money market fund.
Consider these steps if you’re thinking about turning in your I savings bonds from last year. First, you need to wait at least 12 months after purchase before you can redeem the bonds for cash. The second factor is that if you redeem a savings bond within five years of purchase, you need to pay a penalty equivalent to the interest earned over the last three months.
You should time your redemption carefully as you don’t want any high-interest earning months to factor into the penalty. What I’ve found is that if you purchased an I bond in 2022, it generally makes sense to wait at least 15 months after your purchase. So, if you bought the I bond in July 2022, then you can consider redeeming them now.
Why wait at least 15 months you might ask? As we covered, you need to wait at least 12 months to redeem I bonds. Since that one-year anniversary, you have been receiving lower interest with the decline in inflation. Once you have received low interest for three months, that can be a good time to redeem them as it minimizes your penalty.
That I bond you bought in July 2022 earned 9.62 percent annual interest for the first six months, then shifted to 6.48 percent in January 2023, and has been paying 3.38 percent since July 2023. So you would have three months of lower interest (July through September) to forfeit upon redemption. For more information about your I bonds and the interest rate that they have been earning, look up your account at savingsbonds.gov.
Once you redeem your I bonds, it is not recommended to deposit them into a standard checking account (unless you need the funds right away), where the funds will likely earn below 1 percent. Fidelity, Schwab, Vanguard, and other custodians have money market funds currently paying close to 5 percent.
If you loved the inflation adjustment aspect of I bonds, you can now purchase federal TIPS bonds that can pay over two percent above inflation from maturities from one year to thirty years. Be on the lookout for another column where I will explore the details of these investments.
David Gardner is a Certified Financial Planner
