What Should I Do with My I-Bonds Now?
During peak inflation they were all the rage. Up until that point, many people hadn’t heard of I-Bonds, and quite frankly, why would they have needed to? Offering a unique rate which is tied into the rate of inflation, I-Bonds offered investors a nearly 10% interest rate just a few years ago.
Now sitting at 4.28% until the next reset (I-Bond rates are reset every 6 months on the 1st of May & October), many investors are wondering if they should continue to hold their bonds.
With interest rates still high, and the rate of inflation falling (allegedly), is it time to ditch your I-Bonds for a High-Yield savings account or maybe something else? Maybe, but before deciding, take these points into consideration.
- The total holding time to avoid penalties for an I-Bond is 5-years. Although, after you’ve held your I-Bond for over 12 months, you would only forfeit the last 3 months of interest from time of redemption. If you redeem your bonds within 12 months you forfeit ALL the interest payments.
- The interest on I-Bonds, while taxed at the Federal level, is not subject to State & Local Tax. Interest earned on High-Yield Savings accounts and other cash alternatives are typically taxed as ordinary income. So that lesser interest rate you’re getting on your I-Bonds may be netting you more money than a HYS depending on your income.
- Interest rates are going to drop (we think – iykyk as the Gen Z’ers would say). If you’ve been following the multi-year saga of Jerome Powell’s interest rate hikes and upcoming potential cuts, you know there is a high chance that those interest rates we’re getting in High-Yield Savings accounts will go down.
- The timing might work out to make it an easy decision. With the Fed deciding on rates this month, and the I-Bond rate set to reset on October 1st, it should be clear what you should do.
We may have already witnessed the greatest time to buy I-Bonds in our lifetime. Obviously, the current rate is nowhere near peak inflation, but 4.28% is nothing to ignore. Given the unique timing, it may make more sense to take the “wait & see approach” before deciding to make a move, at least until October 1st.