Why I’m Cashing Out My I-Bonds
In January 2022 and January 2023, I purchased I-bonds to replace part of our family’s cash savings. 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.
In 2023, inflation came down and I-bond rates linked to inflation continued to decline. However, late last year and early in 2024, inflation stopped its downward trend and I-bond rates stayed elevated – over 5%. For this reason, I opted not to cash out my I-bonds back in January of this year. However, the Treasury just announced the new I-bond rate of 4.28%.
I-bond rates consist of two parts, the fixed rate (which never changes) and the inflation rate (which changes every 6 months).
The fixed rate was 0% until 2023 and then only .40% for the first part of 2023. The current fixed rate is now 1.30%, so with an overall current rate of 4.28%, the inflation piece is only 3%. For this reason, over the coming months, I-bond owners who bought through 2022 and 2023 will likely see their rate drop to 3-4%, depending on when they bought it. You can find your rate here or review the table below for the past few years of issue dates as of May 2024.
I bought I-Bonds in January 2022 and January 2023 when the rates were 7.12% (0% fixed and 7.12% inflation) and 6.89% (.40% fixed and 6.49% variable). My current rates are 3.94% (for 2022) and 4.35% (for 2023). In July, they are likely to drop to around 3% each. Your I Bond rate will reset at the current rates on the 6-month anniversary of when you bought it – so a January purchase means a July reset.
Right now (May 1st) my savings account is yielding 4.40%. It is also fully taxable at the state level (roughly 5% in Virginia), leaving a pre-federal tax rate of 4.18%. My I-bonds yield 4%+- and are not taxable at the state level. Right now the breakeven is close but over the coming months, the I-bond rates should drop to about 3%. For this reason, I am cashing out my I-bonds and directing them toward my high-yield savings. Pro tip - cash out your I-bonds at the beginning of the month. Interest only accrues monthly so if you cash them out at the end of the month, you get NO interest for the entire month!
It’s important to remember that there is a 3-month interest penalty when you cash out your I-bonds within 5 years of purchase, so I will forfeit a small amount for the interest over the last 3 months. But I suspect I’ll make up for that difference by reinvesting in savings.
There is also a 1-year minimum holding period, so I can only redeem them since both I-bonds have been held for more than 1 full year.
Lastly, it may make sense for you to keep the I-bonds if you don’t have a high-interest-bearing savings account and the funds will be moved to a low-interest checking account. It also could make sense to keep them if you bought the I-bonds as a long-term hedge against inflation since inflation could go back up and the rates would increase again. I think of I-bonds as the last piece of my cash reserves, so when evaluating alternatives, I only consider what I can earn in a high-yield savings account. I also put a premium on simplicity and owning I-bonds adds a layer of complexity that if avoidable, is preferable!
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.