Is it Time to Sell or Hold My I Bonds?

 

What are I Bonds?

I Bonds are a type of government savings bond issued by the United States Department of the Treasury. They are a low-risk investment vehicle designed to help individuals save money over the long term and protect from inflation. They are backed by the U.S. government, making them one of the safest investments available.

How is the Interest Rate on I Bonds Calculated?

The interest rate they pay consists of two components: a fixed interest rate and an inflation rate that adjusts every six months. The combined rate is used to calculate the bond’s earnings. In 2022, inflation averaged 8%, which is the highest rate since the 1980’s. As a result, I Bonds paid a historically high rate of 9.62% for new bonds issued May 2022 to October 2022. 

What is the Current Interest Rate on I Bonds?

New Savings Bonds Press Release

Series I savings bonds issued November 2024 through April 2025 will earn a composite rate of 3.11%. The composite rate combines a 1.20% fixed rate of return with the 1.90% annualized rate of inflation, as measured by the CPI. 

However, this does not mean that the bonds you bought in 2022 will earn 3.11%. If you bought your bonds between May 2020 and November 2022, you locked in a fixed rate of 0%, so you will only earn the 1.90% inflation rate for the next 6 months. If you bought your I bond between May 2023 and October 2023, you locked in a fixed rate of 0.9%, so you’ll earn a composite rate of 2.81% for the next 6 months.

Benefits of I Bonds

• Very low risk
• Interest is state tax exempt
• Interest can also be federally tax exempt if funds are used for qualified education expenses

Drawback of I Bonds

• Cannot be redeemed in the 1st year after purchase
• If redeemed within 5 years of purchase, you will forfeit the last three months interest
• If fixed rate is low or zero, you are only keeping pace with inflation (maybe) and not actually growing your investment (Ibonds only recently became attractive investments due to abnormally high inflation, as inflation cools, they will become less attractive again)

Should I Sell/Hold My Current I Bonds?

If you bought your bond within the last year you are forced to hold it until you’ve owned it for at least a year. 

If you are sitting on bonds with a fixed rate of 0% then all you’re doing is keeping pace with inflation, you aren’t actually growing your money. As a long term investment, there are just a lot better alternatives that offer higher growth potential at a variety of risk levels. You’d be sacrificing a little of interest now with the potential for a much greater return in the long run. Depending on your alternative options for the funds, selling could make sense if you’ll reinvest the proceeds elsewhere or pay off higher interest rate debt.

If your I bond has a fixed rate above zero, it depends on when/if you need the funds and what your alternative investment options are in addition to your investment time horizon and risk tolerance. You likely have better options, it’s worth figuring out what those are.

If you think you’ll use the bonds to pay for education expenses it might make sense to hold. The interest is tax free if used for qualified education expenses; however, it’s such a low amount that you might be better off investing in something else even if it’s not as tax advantaged. 529 accounts are also tax free if used for qualified education expenses. Wisconsin, in addition to many other states, even offers a tax deduction for 529 account contributions. Visit Edvest to learn more about Wisconsin’s 529 plan.

If you have higher interest rate debt, like a HELOC that you took out when rates were low, it’s likely that, as of the time I’m writing this post, you’re now paying a much higher interest rate. It might make sense to sell and pay down your debt.

Bottom Line: There are better investment options out there and you can quickly make up the small amount of interest you’d lose if you sell before holding them for 5 years. Whether that is a high yield savings account or Treasury Bills for short term needs, a 529 account for education expenses, or an investment account with a mix of stocks and bonds for longer term savings.

Should I Buy More I Bonds?

Probably not in our opinion. There are other options that appear more attractive at this time for investors.

For short term savings, there are better options that can offer more liquidity and higher interest rates. I wrote another post about the best place to keep your emergency fund and also talk about options for short term savings goals.

For longer term savings, there are better options that can offer more liquidity and higher returns that will provide true investment growth (as opposed to just keeping up with inflation) over the long term.

For future education expenses, a 529 account is likely a better option. You can access more potential investment growth and still get the benefits of tax free growth for qualified education expenses. Additionally, depending on your state, you can get a state tax deduction for funds you contribute to a 529 account. Visit Edvest to learn more about Wisconsin’s 529 plan.

Other Considerations

• There is an annual purchase limit of $10k/person.
• They earn interest for up to 30 years, after that interest stops.
• The inflation rate adjusts every 6 months, but your fixed rate stays the same as long as you hold your bond.

Go to TreasuryDirect for more information and to buy or sell bonds directly from the U.S. Department of the Treasury.