I-Bonds Rates Drop: Should You Cash Out or Hold Your Bonds?

Series I Savings Bonds, commonly known as I-Bonds, had a moment of superstar status in 2022 when inflation drove the annualized return to a historic 9.62%. For millions of savers, maxing out their $10,000 annual limit was an easy decision. However, as inflation has cooled, so have the returns on these government-backed assets. With rates now hovering significantly lower, many investors are asking the same question: Is it time to redeem these bonds and move the money elsewhere, or do they still play a vital role in your financial plan?

Understanding the Current Rate Environment

To make an informed decision, you must look at the specific numbers rather than general trends. As of the May 2024 announcement, the composite rate for newly issued I-Bonds is 4.28%. This rate applies to bonds purchased through October 2024.

This 4.28% figure is a combination of two separate components:

  1. The Fixed Rate: This is set at 1.30% and stays with the bond for its entire 30-year life.
  2. The Inflation Rate: This changes every six months based on the Consumer Price Index (CPI).

While 4.28% is decent, it is a sharp decline from the 9.62% highs of 2022 or even the 6.89% seen in late 2022. If you are holding older bonds, your specific return depends on when you bought them. Bonds purchased during the peak in 2022 likely have a 0.00% fixed rate. This means your total return is entirely dependent on inflation. Now that inflation is lower, those specific bonds are earning much less than newer bonds that carry the 1.30% fixed bump.

The 3-Month Penalty Factor

You cannot simply compare your I-Bond rate to a bank CD and switch immediately. You must account for the early withdrawal penalty.

If you cash out an I-Bond before holding it for five years, you forfeit the last three months of interest. This rule is critical to your exit strategy.

The “Wait and See” Strategy

If your bond is currently earning a high rate that is about to drop, you should not sell immediately when the rate changes. Instead, you should wait three months after the rate drops.

Example: Imagine your bond was earning a high rate in April, but the rate dropped on May 1.

  • If you sell in May, the penalty will eat into three months of that previous high interest.
  • If you wait until August to sell, the penalty will only cost you the three months of the new, lower interest rate.

By timing your exit, you ensure you keep every penny of the high-yield period.

The Case for Selling (Cashing Out)

There are compelling mathematical reasons to liquidate your I-Bonds right now, primarily driven by the “opportunity cost” of keeping cash tied up in lower-yielding assets.

1. Better Rates are Available Elsewhere

The financial environment has shifted. You can currently find risk-free or low-risk investments that outpace the current inflation-adjusted I-Bond returns.

  • Treasury Bills (T-Bills): Short-term T-Bills (4-week to 52-week) have been yielding above 5.30%. Unlike I-Bonds, these are liquid and have no withdrawal penalties if held to maturity.
  • Certificates of Deposit (CDs): Online banks like Ally Bank, Marcus by Goldman Sachs, and Capital One often offer CD rates exceeding 5.00% for 12-month terms.
  • High-Yield Savings Accounts (HYSAs): Top-tier HYSAs are offering 4.50% to 5.15% APY. While this is variable, it offers full liquidity without the 12-month lock-up period required by I-Bonds.

If you are holding a 2022-era I-Bond with a 0% fixed rate, your composite rate might drop below 4%. In this scenario, paying the 3-month penalty to move that money into a 5.3% T-Bill could net you more money over the next year.

The Case for Holding

Despite the rate drop, I-Bonds offer unique features that standard savings accounts cannot match. You should pause before selling if any of the following apply to you.

1. State and Local Tax Exemption

Interest earned on I-Bonds is subject to federal income tax, but it is exempt from state and local income taxes.

If you live in a high-tax state like California, New York, or New Jersey, the “real” return on an I-Bond is higher than a bank CD. A 5% CD in California might effectively yield only 4.5% after state taxes are removed. An I-Bond yielding 4.28% keeps that full yield at the state level. You must calculate the “tax-equivalent yield” before swapping assets.

2. The Fixed Rate Advantage (For Newer Bonds)

If you bought I-Bonds recently (since late 2023) and locked in a fixed rate of 1.30%, these are incredibly valuable long-term holds. If inflation spikes again in the next decade, your bond will earn the inflation rate plus that 1.30%. Bonds from 2022 have a 0% fixed rate, making them less attractive for the long haul.

3. Education Tax Exclusion

If you plan to use the money for qualified higher education expenses, the interest on your I-Bonds might be completely tax-free at the federal level (subject to income limits). No CD or High-Yield Savings Account offers this benefit. If you cash out now to chase a slightly higher rate, you lose this tax advantage permanently for those specific bonds.

4. Insurance Value

I-Bonds act as insurance against hyperinflation. While inflation is cooling now, we do not know what the economy will look like in 2026 or 2030. Holding a portion of your portfolio in assets that automatically adjust to the cost of living provides safety that fixed-rate bonds cannot offer.

How to Check Your Specific Rate

Do not guess what your bond is earning. Because I-Bond rates change every six months based on your specific purchase month, your rate might differ from the current headline rate.

  1. Log in to your account at TreasuryDirect.gov.
  2. Click on your “Current Holdings.”
  3. Click on the specific bond to see the current interest rate and current value.
  4. Note: TreasuryDirect usually shows the value after the 3-month penalty has been applied (for bonds younger than 5 years).

Frequently Asked Questions

Can I cash out only part of my I-Bond? Yes. You can redeem any amount as long as it is at least $25, and you leave at least $25 in the bond. You do not have to cash out the full $10,000 at once.

When do I pay taxes on I-Bond interest? You have a choice. You can report the interest every year on your tax return, or you can defer reporting the interest until you cash the bond or it matures (after 30 years). Most people choose to defer the taxes. When you sell, you will receive a 1099-INT form.

Is there a best time of month to sell? Yes. I-Bonds earn interest for the entire month on the first day of the month. If you sell on the 2nd of the month, you get credit for the whole month. Therefore, it is best to sell early in the month to secure that month’s interest, rather than waiting until the end of the month.

If I sell now, can I buy back later? Yes, but you are limited to purchasing $10,000 in electronic I-Bonds per person, per calendar year. If you sell $10,000 worth of bonds today, you cannot buy more than the annual cap if rates skyrocket again next year.