Why I’m Holding Onto My I-Bonds
In January 2022 and January 2023, I purchased I-bonds to serve as a replacement for part of our family’s cash savings. Back in 2022 when I-bond rates were over 7%, I wrote about how if you had cash that you could afford to tie up for a year, I-bonds were a good option. Rates then peaked in the middle of 2022 at nearly 10% before starting to come back down. Last year around this time, I wrote about how I still thought I-bonds offered a reasonable rate over alternatives.
During 2023, inflation came down and I-bond rates that are linked to inflation continued to go down. Currently, rates are sitting at 5.27%. I’ve had a few clients ask if they should go ahead and cash out their bonds from the past few years now that rates have gone down.
Since there is a 1-year minimum holding period, the I-bonds I purchased in 2023 became available for redemption in 2024 and I decided to take a close look at whether or not to redeem them. Some consider I-bonds as an investment or an inflation hedge and they could have other reasons for buying, holding, or selling them - but I personally do not. I think of I-bonds as the last piece of my cash reserves so when evaluating alternatives, I am mostly considering what I can earn in a high-yield savings account. I am also thinking about what penalty I will have to pay to get out of the I-bonds since you forfeit your last 3 months of interest if you redeem them within 5 years of purchase.
Right now (January 4th) my savings account is yielding 4.50%. It is also fully taxable at the state level (roughly 5% in Virginia), leaving a pre-federal tax rate of 4.27%. My I-bonds are yielding 5.27% and are not taxable at the state level. For now, there seems to be about a 1% difference in yield, favoring I-bonds over high-yield savings.
In addition, right now, the penalty would be roughly 1.3% (last 3 months of interest). If rates continue to come down, which I expect they will to some degree, the penalty for redeeming them will also drop. Lastly, my I-bond rate is fixed through April, while high-yield rates can vary daily. For these reasons, I plan to hold onto my I-bonds through April and evaluate again when the rates adjust.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.