I Bonds: Are They Still a Good Deal? (2024)

“A couple of years ago every article about where to park your cash recommended Series I bonds as an excellent option. Are they still a good investment?”

You’re right: In 2022, Series I bonds, issued by the U.S. Treasury, rode a wave of popularity because they were one of the few safe ways to beat then-soaring inflation. “Rates were so poor everywhere else that people were like, ‘Wow, I’ll take 9% in a heartbeat,’” says Bob Peterson, a Chicago-area financial advisor.

I bonds’ rates have since dipped from their headline-grabbing heights—they were as high as 9.62% in May of 2022—to 4.28% for the current crop. That rate may still look attractive, but I bonds’ variable rates—combined with their five-year lockup period—may give you pause.

If you buy I bonds today, you could find yourself shackled to an investment with diminishing returns, says Aaron Brachman, a financial advisor in Washington: “I’ve never thought I bonds were a good place to park cash,” he says.

How I bond interest works

I bonds are designed to generate enough interest to beat inflation. That interest consists of two parts. First, each bond has an interest rate that is fixed for its life. The Treasury Department sets the rate every May 1, and it applies to all bonds issued through Oct. 31, when the rate is set for another six months of issues, and so on. For I bonds issued between May 1, 2024 and Oct. 31, 2024, the fixed interest rate is 1.3%.

A second interest component is based on inflation rates, and it resets every six months. It most recently reset in May and is currently 2.96%, down from 3.94% last November.

If inflation manages to inch lower by the time Nov. 1 rolls around—when the inflation component of I bond rates is adjusted again—we could see lower rates on I bonds for the following six months. That outcome remains to be seen, though, as inflation has been sticky as of late.

What if I want my money back?

Investors can purchase up to $15,000 of I bonds annually: $10,000 worth of electronic bonds bought through the TreasuryDirect website and $5,000 worth of paper bonds, which can only be purchased using your federal tax refund. Unlike Treasury bonds, I bonds can’t be resold on the open market. You can redeem them with the government prior to maturity, but there are caveats.

I bonds become eligible for redemption one year after they’re purchased. But if bonds are cashed within five years after their issue date, interest earned in the three months before redemption is forfeited. I bonds earn interest for as long as 30 years, and while their interest rates may change, their redemption value will not.

So are I bonds worth it?

Whether I bonds make sense for you depends on your goals. If you only want to beat inflation, they’ll ensure that you succeed. But if their $15,000 annual investment ceiling, withdrawal restrictions and interest rate uncertainty are turn offs, there are alternatives.

Treasury inflation-protected securities, or TIPS

TIPS’ design differs from I bonds’ design in that their principal value is adjusted to reflect the current inflation rate. Unlike I bonds, which pay their interest at redemption, TIPS pay a fixed rate of interest every six months. You can buy millions of dollars’ worth of TIPS, and you can sell them on the secondary market if you need to cash in a pinch—although the sale price will probably differ from your purchase price. But TIPS’ tax treatment is a big drawback: Both income payments and increases to principal values are taxable.

U.S. Treasury bonds

Treasury bonds currently pay fixed yields between 5.19% for a one-year bill and about 4.5% for five and 10-year maturities. They’re publicly traded. Treasurys pay an ongoing stream of interest, and like I bonds, their interest is free from state and local taxes. As to federal taxes, I bonds do have one advantage: Their earned interest can be tax-free if used for qualified higher education expenses such as tuition, books and room and board.

Money-market funds

These mutual funds, which invest in short-term, high-quality bonds, are another option. Brachman likes supersafe, ultracheap U.S. Treasury money-market funds, which are yielding over 5%.

High-yield savings accounts

Finally, those who are willing to shop around can still earn a good, safe yield via bank savings accounts and certificates of deposit (CDs). The best savings accounts are paying upwards of 4% and 5%, and the best one-year CDs are paying nearly 6%.

But bank rates, which are variable, may not be as attractive once the Federal Reserve starts lowering interest rates, Brachman says. Most banks raised their rates slowly as the central bank hiked rates between March of 2022 and July of 2023, he notes, “and they’ll probably be quick to move rates on the way down.”

Meet the contributor

I Bonds: Are They Still a Good Deal? (1)

Steve Garmhausen

Steve Garmhausen is a contributor to Buy Side from WSJ.

I Bonds: Are They Still a Good Deal? (2024)
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