Why it May be a Good Time to Cash Out I Bonds

The buzz around I bonds in the personal finance community has been off the charts the last few years, with guaranteed interest rates not seen anywhere else in recent decades, and no risk-free comparable investment alternatives. I gave an in-depth I bond overview and covered how to buy I bonds previously to help readers take advantage. Well… nothing lasts forever. The current I bond rate now has a variable rate of 2.96% for current I bond issues. As a result, I’ve decided to sell 3 years worth of I bonds that I previously purchased. I detailed how to sell I bonds and redemption considerations in great detail.

I bond rate drops are fairly big news for those of us who have been snatching up as much in I bond purchases as the government allows the last few years. The current rate is now lower than many short-term fixed rate investments. This all begs the question “Is it time to cash out my I bonds?”. There’s a lot to cover here, so let’s dig in.

Why Were I Bonds Such a Great Value in Recent Years?

Long story short, the U.S. Treasury (through issuing I bonds) adapted much more quickly to the increase in inflation than the Federal Reserve did. This led to 2 years of I bonds out-earning typical bank and credit union deposit account rates by multiple percentage points – making I bonds a go-to destination for those seeking a high guaranteed return. This started with the May, 2021 rates and continued through April of 2023. To recap, here’s the recent history of I bond rates over the last six 6-month periods:

• 5/21 – 11/21: 3.54%
• 11/21 – 5/22: 7.12%
• 5/22 – 11/22: 9.62%
• 11/22 – 5/23: 6.89% (6.49% variable, 0.4% fixed)
• 5/23 – 11/23: 4.30% (3.40% variable, 0.9% fixed)
• 11/23 – 5/24: 5.27% (3.94% variable, 1.3% fixed)
• 5/24 – 11/24: 4.28% (2.96% variable, 1.3% fixed)

Meanwhile, the Federal Reserve was slow to act on inflation and didn’t start rapidly raising its rates until the 2nd half of 2022:

With the Fed keeping its interest rates low until late 2022, banks also kept their deposit account rates low as the two generally move in lock-step. This resulted in roughly a 2-year window where investors could purchase I bonds that would earn them significantly more than the near-zero return on bank deposits, in addition to other benefits (e.g. I bonds are exempt from state and local taxes).

Why Are I Bonds Not as Appealing After the Latest I Bond Rate Levels?

With the Fed aggressively raising interest rates the 2nd half of 2022 and in early 2023, bank deposit accounts (and regular U.S. Treasury Bonds) have followed suit. Meanwhile, inflation has receded. In December, the Consumer Price Index increased 0.4 percent, seasonally adjusted, and rose 3.8 percent over the last 12 months.

As a result, the U.S. Treasury has dropped the total interest rate on new I bond purchases to 4.28% (including a 2.96% variable rate). So, we’ve plausibly reached a crossover point where bank deposit accounts and regular U.S. Treasury Bond rates are commonly at higher rates than current I bond rates. And, if inflation continues to decline, this could continue for a while (roughly until the Fed lowers interest rates to levels below inflation rates). As of date of publish, for example, you could purchase shares of Vanguard’s U.S. Treasury Money Market Fund (VUSXX) with compound interest rates of 5.29% or shorter-length CDs commonly in the 5.1% – 5.4% range – both better than the latest I bond rate – and without the annual limitation restrictions of I bonds.

Few of us can accurately predict what will happen next with inflation rates or Federal Reserve interest rates – but at this snapshot in time, with bank deposits and U.S. Treasuries having caught up to and surpassing I bond rates – the purchase of new I bonds is no longer as appealing as it was previously, particularly for those seeking the highest fixed rates. In other words: the 2-year no-legit-high-guaranteed-return-alternative-to-I-bond party is likely over for now. I bonds could still be a nice long-term diversification play – there are a lot of places you could put your money that are worse than an inflation-adjusted savings account with zero state and local taxes, after all.

You are able to lock in the 4.28% rate on new purchases through October 30, 2024 and be guaranteed that rate for 6 months from the date of purchase, so it may be worth holding off on any new I bond purchases so you can see what happens to inflation and interest rates elsewhere by then.

Is Now a Good Time to Cash Out I Bonds?

This is a very personal decision, and the answer will depend on a variety of factors. Here are the variables to consider:

• Every I Bond purchase (referred to as an “issue”) is considered unique, and depending on when you purchased a given I bond, it will impact if you can close it out and whether or not it makes sense.
• All I bonds issued must be held for a minimum of 1 year. So any I bonds that you purchased less than 1 year ago must be held at least until you hit the 1-year anniversary mark from date of purchase. In other words, you can’t cash out these I bonds just yet, even if you want to.
• Any I bonds issued over 5 years ago can be redeemed without penalty. The holders of these I bonds should look at their fixed rate plus the current 2.96% variable rate to determine if holding onto the I bond continues to make sense.
• If an I bond issue is held for less than 5 years, the holder forfeits the most recent 3 months of interest returns as a penalty.
• All I bonds older than 6 months receive the current variable rate of 2.96% (plus any fixed rate assigned at time of issue). The current added fixed rate (1.3%) only applies to new issues, not older ones.
• If forfeited now, those same 6-month to 5-years old I bonds just received a variable rate of 3.94% the last 3 months and forfeiting right now (only possible for I bonds over 1 year old) would result in forfeiting 3-months of interest earned.

From here, it will depend on what the current interest rates on alternative similar investments (e.g. regular U.S. Treasuries, money market funds, CDs, etc.) are and what the fixed rate on your I bond issues are and your personal cash flow situation.

Mandatory disclaimer: I’m not an investment advisor, so you should consult one or make your own personal decision on what is a good investment for you and when and if it makes sense to close out any I bonds you’ve purchased. There most likely will be individual tax implications associated with selling I bonds too. Everyone’s personal situation (e.g. tax rate, income-level, income-needs, etc.) is different. These are just the things that I am considering and I’m personally choosing to hold for at least the next 3 months and will re-evaluate after that.

How to Close Out an I Bond

If, after taking everything into account you have made the determination that it’s time to cash out an I bond, here are the simple steps to take:

1. Log in to your account at treasurydirect.gov.
2. Click on “Current Holdings” on the navigation bar.
3. Select “Series I Savings Bond” and then “Submit”.
4. Select which I bond issue you would like to redeem (close out) and “Select”.
5. Choose “Redeem”.

That’s it.