When inflation was heating up in 2021/2022, there came a point when the interest rate on an I Bond was north of 9% (on an annualized basis). While I Bonds purchased today currently offer a compelling rate of 4.28%, this doesn’t give the full story. Digging deeper into the calculation on interest rates of I Bonds could beg the question, “is now the time to redeem your I Bonds and consider other investments?

Math and Self Reflection 

That question is not easily answered. It’s determined by your personal financial situation and some math. The math part includes several factors. First, I Bonds can be redeemed after one year, but if after that year you are still within the first five years of ownership, you pay a penalty equal to the most recent three months’ of interest. Second, the interest rate on I Bonds is a combination of a fixed rate set at purchase and a variable inflation rate that adjusts every six months. From May 2020 until October 2022 the fixed rate was zero; all interest was earned based on the variable rate.  Bonds purchased during that period continue to have a zero fixed rate meaning they are only earning the inflation-linked portion of the current 4.28% rate which is only 2.98% (the current fixed rate for new purchases is 1.3%).Third, the month in which you bought your I Bond determines the interest rate you earn on an I Bond over that six-month period. Fourth, I Bonds should be compared to the potential returns of other safe investments.

Other Investment Options?

With interest rates remaining relatively robust and steady year-to-date, other investment options may be more attractive. Certificates of Deposit (CDs) and certain Treasury bonds could potentially offer competitive returns without as significant an early redemption penalty. For example, according to Schwab as of May 20th, 2024, 2-year CDs are averaging 5% and 2-year Treasuries (not subject to state income tax) are yielding 4.87%. Locking in these rates now would secure a safe return that won’t fluctuate every six months with inflation adjustments like I Bonds. about your plan’s participants and finances.

Decisions to Make

If you purchased I Bonds recently, they may have a fixed rate component making it beneficial to hold onto them. However, if you’ve held them for a while and the fixed rate is low, or zero, exploring other investments could be a good option even though you may be forfeiting three months of interest. Just remember to do the math and think about your individual circumstances and financial plan before making any decisions. If you do decide to sell, plan to do so early in the month as interest is credited only if you are a holder on the last day of the month.

If you’re unsure about what to do, talk to your accountant or financial advisor to help you determine next steps.