Why I Sold My I Bonds: I Bond Redemption Considerations

I Bond Update: I Decided to Sell my I Bonds

I wanted to provide an update to readers on my current assessment of U.S. Treasury I bonds. As long-time followers might know, I had been a fan of these popular inflation-protected savings bonds in recent years, particularly as their rates jumped far ahead of market rates for other low-risk government-insured investments (e.g. money market funds, saving accounts, and CDs). In fact, I had purchased $10,000 in new I bond issues each of the last 3 years.

However, I bond variable rates have been trending downward as inflation has declined which has made them less appealing to hold on to compared to alternatives. I alluded to the possibility of cashing out as early as last May, but I decided to sell my I bonds in the last few months, after the November 2023 variable rate update. I’ll discuss why I sold my I bonds and some considerations to make before redeeming.

Why Did I Sell my I Bonds?

The current I bond rate for I bonds purchased November, 2023 through April, 2024 is a composite rate of 5.27%, with a fixed rate of 1.30% on new purchases and a variable rate of 3.94% on all issues. 5.27% is not a bad interest rate at all. For a near risk-free investment, it’s very competitive with alternatives. I, however, was not earning 5.27% on my I bonds. Remember, the way I bonds work (highlighted in my I bond overview), there are 2 components to the rate that I bond holders earn:

1. Fixed rate return: this rate never changes over the life of the bond. If you buy an I bond when the fixed rate is 2%, you will get 2% annually, for the 30-year life of the I bond. If you buy a bond when the fixed rate is 0%, you will get 0% annually for the life of the bond.

2. Variable semi-annual inflation rate return: this rate is tied to the Consumer Price Index for all Urban Consumers, or CPI-U, which is a measure of consumer inflation that is re-evaluated every 6 months. All previously purchased, unexpired bonds get this rate of return on top of the fixed rate of return.

That variable rate is calculated by multiplying the semi-annual inflation rate (most recently 1.97%), by 2 (as it’s semi-annual). I had purchased I Bonds in the following months, which came with high variable rates that I received for the first 6 months after purchase, but very low fixed rates, as you can see:

1. Issue #1 – June, 2021 purchase: 0.0% fixed rate
2. Issue #2 – January, 2022 purchase: 0.0% fixed rate
3. Issue #3 – January, 2023 purchase: 0.4% fixed rate

The variable rates change every 6 months at the beginning of every May and November. With the new I bond rates that went live November 1st of last year (1.30% fixed on new issues and 3.94% variable rate on existing issues), my first 2 I bond issues were earning just 3.94% when I sold them in December – notably below what other very low-risk deposit-account type investments were earning. In other words, those I bonds, which were originally far-ahead of market rates, were now laggards. Those I bond issues were beyond the 1-year mandatory holding period, so I could sell them (I did lose the prior 3 months of interest earned as a penalty since the bonds had not yet reach the 5-year mark, but factored that in to my decision).

I Bond Issue #3 was earning a bit more (3.94% variable + 0.4% fixed rate = 4.34% total), but still a decent amount less than market alternatives. Once it surpassed the mandatory 1-year holding period, I decided to sell it as well (losing 3 months of interest in the process).

After the early-redemption interest penalties, my return for the 3 I bond issues was:

1. I Bond Issue #1: 14.4% over 28 months (5.76%/year)
2. I Bond Issue #2: 12.4% over 22 months (6.76%/year)
3. I Bond Issue #3: 4.4% over 12 months (4.4%/year)

That’s pretty good given that fed interest rates were 0% until mid 2022 and didn’t get above 5% until the 2nd half of 2023. I have no regrets on the I bond purchases. There was a multi-year window where I bonds paced ahead of other low-risk alternatives and I was lucky enough to take advantage of that. Now that my particular bond issues were laggards with their low fixed rates and declining inflation, it was time to put those resources elsewhere.

The current I Bond rate of 5.27% on new issues is still pretty competitive and the current 1.3% fixed rate on new issues is the highest fixed rate since 2007. Depending on what the projected rate change will be as we get closer to the new rate announcement for May, I may even purchase a new issue at that time.

Disclaimer: do not take this article as a recommendation to buy/sell/hold I bonds. I’m an amateur investor, not an investment advisor, and everyone’s personal situation (e.g. tax rate, income-level, income-needs, etc.) is different. I merely wanted to share how I approached my personal situation, but your situation will surely vary.

Interest Penalty, Tax & Other Considerations when Redeeming I Bonds

Here’s a few reminders on some of the restrictions and considerations to take into account before selling I bonds:

• Interest earned on I bonds may be subject to federal income tax, but not state or local income tax.
• Holders can put off (defer) reporting I bond interest until they file a federal income tax return for the year in which they actually get the interest (in the year the bond was redeemed), or report the interest each year even though you don’t actually get the interest. Most choose to defer versus reporting every year. Depending on possible income tax bracket changes between years, this could have a notable impact on your tax situation and the optimal selling year. You may also be able to avoid paying all or some of the federal tax on the interest if you use the interest earned from the bond to pay for college expenses.
• All I bonds issued must be held for a minimum of 1 year before redemption.
• If an I bond issue is held for less than 5 years and redeemed, the holder forfeits the most recent 3 months of interest returns as a penalty (current calendar month and previous 2).
• Any I bonds issued over 5 years ago can be redeemed without an interest penalty.
• Keep in mind that the current variable rate you are receiving on your I bonds goes in 6 month cycles from the month you purchased. For example, if you purchased in September, you would get the interest rate that started May 1st for September through February and then November 1st’s interest rate would kick starting March 1st. This will impact the early-redemption interest penalty when determining the optimal selling date. Here’s a table that may help:

How to Sell I Bonds, Step-by-Step

If you decide that you would like to redeem/sell I bonds, I found the process to be pretty straightforward. Below are step-by-step instructions on how to sell I Bond issues (both electronic and paper).

How to Sell Electronic I Bonds:

If you are selling electronic I Bond issues that you purchased on TreasuryDirect (note: the “Current Value” amount in your account for your issue does not include the 3 months interest that will be forfeited if the bond has been held for less than 5 years – it’s the actual amount you will receive when selling):

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. Choose which I bond issue you would like to sell (redeem) and “Select”.
5. Choose “Redeem”.
6. Choose the payment destination (e.g. bank account) and “Review” and then “Submit”.

I received my I bond payments within 48 hours from selling, but your mileage may vary.

How to Sell Paper I Bonds:

If you are selling paper I bond issues, you may be able to redeem with your bank, or you can do so directly with Treasury:

1. Download and fill out FS Form 1522.
2. If the value of the bond(s) you are cashing is more than $1,000, you must have your signature certified.
3. Send the form and the bonds to the address on FS Form 1522.