I Bonds

I Bonds Explained: Are I Bonds Worth Buying In 2024?

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Are you interested in a guaranteed investment that pays just over 5% interest? The I Savings Bonds interest rate is now 4.28%. In this blog, we are going to explain why several investors are looking into I bonds and we will give you our honest opinion on this investment strategy.

What are I Bonds?

I Bonds are inflation-protected savings bonds that are 100% backed by the U.S. federal government. They are designed to protect the value of your money from inflation. The “I” stands for inflation. The interest rate on I Bonds is directly correlated with inflation. If inflation is high, the interest rate is high. If inflation is low, the rate is low. Inflation is very high right now. 

The Treasury created 30-year I Bonds in 1998 so that investors had a tool they could use to hedge against inflation. They are backed by the federal government, so unless the government shuts down and defaults on its debt (which politicians like to threaten every now and then), the interest rate on I Bonds is almost guaranteed. In essence, think of I savings bonds as like a high-yield CD.

How do I Bonds work?

Step 1 –  Purchase: You can purchase I Bonds directly from the US Treasury website, or through your bank or financial institution. The minimum investment is $25.

Step 2 – Interest calculation: The interest on I bonds is calculated by combining the fixed and variable rates. This will compound semiannually.

Step 3 – Redemption: I Bonds can be redeemed after 12 months of ownership. However, if they are redeemed before five years have passed, you will forfeit three months of interest. 

Step 4 – Taxation: I bonds are exempt from state and local income taxes but they are subject to federal income taxes. They may also be exempt from federal income taxes if they are used for a qualified education purpose.

(Don’t forget to download the ‘Where Should My Next Dollar Go?’ guide if you haven’t already).

How is I Bonds interest rate calculated? 

I Bonds interest rate is a combination of two rates which is called the composite interest rate. It is calculated based on a fixed interest rate and an inflation-adjusted rate.  The interest structure is what makes them quite unique. 

The composite interest rate is a complex formula: Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]

  1. The fixed interest rate is set at purchase and lasts 30 years. This is currently set at 1.30%.
i bonds fixed rate 2024

2. The inflation adjusted-interest rate is calculated twice a year which is usually May 1 and November 1.

i bonds inflation rate 2024

When you go to the Series I Bonds, it will say you’ll get 4.28% interest rate from May 2024 until October 2024.

i bonds 2024

What is the current I Bonds rate?

The I Bonds rate is 4.28%. This was released in May 2024. 

What was the previous I Bonds rates?

November – I Bonds Rate: 5.27%
April 2023 – I Bonds Rate: 4.86%
November 2022 – I Bonds Rate: 6.89%
May 2022 – I Bonds Rate: 9.62%
November 2021 – I Bonds Rate: 7.12%

I Bonds rate history

DATEFIXED RATEINFLATION RATEI BONDS COMPOSITE RATE
May 2024 - October 20241.30%1.48%4.28%
November 2023 - April 20241.30%1.97%5.27%
May 2023 - October 20230.90%1.69%4.30%
November 2022 - April 20230.40%3.24%6.89%
May 2022 - October 20220.00%4.81%9.62%
November 2021 - April 20220.00%3.56%7.12%
May 2021 - October 20210.00%1.77%3.54%
November 2020 - April 20210.00%0.84%1.68%
May 2020 - October 20200.00%0.53%1.06%
November 2019 - April 20200.20%1.01%2.22%

Do I Bonds earn interest monthly? 

Yes, I Bonds earn interest monthly. However, you only get access to those interest payments when you cash out the bonds. The interest you earn is added to the value of the bond twice per year (May and November). 

Is the current inflation interest rate on I Bonds 4.28%? 

Yes, 4.28% is the current inflation interest rate if you purchase the I Bonds before October 31, 2024. The previous I Bonds interest rate was 5.27% for November 2023 to April 2024. This also means that the composite rate is also an annualized 4.28% for the first 6 months that the bond is held. 

This investment is guaranteed by the federal government. However, before going on an I Bonds shopping spree, read the fine print! You must own the bond for at least 5 years to receive all of the interest. You can cash out an I Bond after one year, but if you withdraw it before 5 years, you’ll forfeit 3 months of interest. How does that affect your return?

Let’s say you buy I Bonds today at a rate of 4.28% (valid for 6 months), and the rate stays the same in November 2024 (rate valid for another 6 months). If you cash out 12 months after buying I Bonds, your net interest rate will likely be 3.21% (since you will forfeit 3 months worth of interest).

How long do I have to hold an I Bond? 

You can cash I bonds once you have owned them for a minimum of one year. However, if you cash them in before five years, then you will lose three months of interest. I bonds earn interest for 30 years unless you cash them out before then.

What is the early withdrawal penalty?

If you withdraw an I Bond within the first five years after it was issued, then you will forfeit the most recent three months of interest.

There are no withdrawal penalties after five years. However, if you withdraw before it has reached its final maturity date (30 years), you may miss out on additional interest payments. 

Are I bonds taxed?

I bonds are subject to federal income taxes but they are exempt from state and local income taxes. This makes them even more attractive to those who live in high-tax states and cities. They can sometimes be fully tax-exempt if they are used to pay for qualified higher education.

You can choose to pay taxes on the interest earned when they are cashed. If you cash out any I Bonds in a specific year, then Treasury Direct will generate a 1099 tax form for the accumulated interest. 

The owner is responsible to pay for the taxes. This means that if you were gifted an I Bond, you must pay the tax owed

Are there any I Bonds tax benefits?

Yes, there are tax benefits associated with I Bonds. One of the main tax benefits of I Bonds is that the interest earned on these bonds is exempt from state and local income taxes.

In addition, if the bonds are used to pay for qualified educational expenses, the education tax exclusion that can help you exclude all or part of your I Bond interest from your gross income. However, you must meet several conditions. These include: 

  • You must be 24 years or older.
  • Your tax filing status must not be married filing separately.
  • You paid for the qualified higher education expenses that same tax year.
  • You claim the exclusion in the same year that you cash the I bonds.
  • Your modified adjusted gross income (MAGI) is less than $100,800 if single or $158,650 if married filing jointly.

When do you pay taxes on I Bonds?

The taxes on I Bonds are typically paid when they are redeemed or reach maturity. The interest earned is subject to federal income tax but the tax can be deferred until the bonds are redeemed or reach final maturity.

However, federal income tax may not apply to the interest you earn on I Bonds if you use the proceeds to pay for qualified higher education expenses.  If you have any questions about the tax implications of I Bonds, then consult your financial advisor or tax professional. 

How many I Bonds can you purchase per year?

You can buy up to $10,000 worth of I bonds annually. You can also purchase an additional $5,000 with your tax refund. This is $5,000 per tax return, not per person. If you are a single tax filer, you can purchase $15,000 annually ($10,000 electronically and $5,000 with your tax refund). 

For those with larger portfolios, the $10,000 annual limit on I Bonds can make them look less appealing as an investment strategy. However, there are some additional ways that you can purchase more I Bonds. If you have a business, then the business can purchase an additional $10,000 in I Bonds per year. If you have a trust, then you can purchase an additional $10,000 for the trust account.

For example, if you are a married couple filing jointly and you each have a business and one has a trust then you can purchase $55,000 in I Bonds as outlined below.

  • $10,000 in Person A’s personal account 
  • $10,000 in Person B’s personal account 
  • $10,000 in Person A’s business account
  • $10,000 in Person B’s business account
  • $10,000 in Person A’s trust account
  • $5,000 using money from their tax refund

You can also buy an unlimited number of I Bonds as gifts. You can purchase 10k or 20k of I Bonds for your spouse as a gift, and your spouse can do the same for you. Keep in mind though that once the I Bonds are given as a gift, it will count towards the annual limit of the recipient. So if your spouse already bought $10,000 this year, he or she can’t receive your gifted I Bonds this year. It’ll have to wait until the year when your partner is not buying I bonds.

The main risk of this loophole is that if you buy too much, the I Bonds rate will have fallen in 2024 or beyond, and you’ll be stuck at a lower rate.

Are I bonds a good investment?

I’ll give you 4 reasons why I bonds might be a good investment and 4 reasons why you should think twice.

The benefits of investing in I bonds:

  1. I Bonds are a great inflation hedge. Whenever inflation is up then the rate is up.
  2. 4.28% potential return for an investment guaranteed by the federal government is pretty good. 
  3. I Bonds are exempt from state and local taxes but you do have to pay federal taxes. They may also be entirely tax-exempt if they are used to pay for qualified higher education. It can be an attractive college savings strategy as an alternative or in addition to a 529 plan.
  4. The redemption value of your I Bonds cannot decline.

The downsides of buying I bonds:

  1. There is a lack of flexibility because you will be locked-in for 1 year. You cannot withdraw for the next 12 months and even if you do withdraw after 12 months (but before 5 years), you will forfeit 3 months worth of interest. 
  2. If inflation drops, then your return will drop. 
  3. The maximum purchase of digital I Bonds is $10,000 per person. You can also use your federal income tax refund to purchase an additional $5,000 in paper I Bonds. You will need to think about if that’s worth your time.
  4. If you have excess cash, can you make more money investing in stocks?

Is there a loophole to buy I Bonds above the $10,000 limit?

You can only buy up to $10,000 per person per year. However, if you want to buy more, there is a loophole. You can do a combination of these 3 things:

  1. Buy $10,000 for your spouse or partner. 
  2. If you have a child, buy $10,000 for your child. You’ll need to open a TreasuryDirect account for your child and link it to your TreasuryDirect account.
  3. You can also buy an unlimited number of I Bonds as gifts. You can purchase $10,000 or $20,000 of I Bonds for your spouse as a gift, and your spouse can do the same for you. Keep in mind though that once the I Bonds are given as a gift, it will count towards the annual limit of the recipient. This means that if your spouse already bought $10,000 this year, he or she can’t receive your gifted I Bonds this year. It’ll have to wait until the year when your partner is not buying I Bonds. The main risk of this loophole is that if you buy too much, the I Bonds rate might fall by the time it’s given as a gift, and you’ll be stuck at a lower rate.

Can I Bonds lose value?

No, I Bonds can’t lose value. The interest rate cannot go below zero and the redemption value can’t decline.

How to invest in I Bonds?

There are two ways to invest in I Bonds.
1) You can buy I Bonds electronically via TreasuryDirect.gov.
2) You can also purchase up to $5,000 of paper I Bonds from your tax return.

You cannot resell them and you must cash them out directly with the US government. Electronic I Bonds can be redeemed directly on the Treasury Direct website and the paper I Bonds can be cashed in at a local bank. 

To purchase electronic I bonds from the Treasury Direct website, follow the instructions below. 

Step 1: Choose the type of account you are opening.  You will choose the first option for individual/personal. You will also use this option if you are purchasing for a business or a trust.

Step 2: Provide personal information. This includes information such as your SSN, email address, bank account, and routing number. Since the application is linked to a bank account, make sure that you choose one that you are going to use forever. Changing a bank account once you have established an account on Treasury Direct can be a complicated process. 

Step 3: Choose your password, personalized image, security questions etc. After you have completed this step, you will receive your account number by email. Make sure you save your account number because this is what you will use to log in to your account.

When is the last day that I can buy I Bonds at the 4.28% rate?

The last day that you can buy I Bonds at the 4.28% rate is October 31, 2024. However, you should purchase by October 26 to make sure that they are issued in time. This will start you with an annualized rate of 4.28% which would apply for six months after your purchase.
 

Will the I Bond rate go up in November 2024?

The new I Bond rate will be released on November 1, 2024. We will keep you updated when we hear more.
 

What should I do if I’ve already maxed out I Bonds purchases for 2024?

If you have already maxed out your I Bonds purchases for 2024, then you may want to look into brokered CDs or T-Bills.  

Should I redeem my I Bonds? 

Before redeeming your I Bonds, it’s important to consider several factors to make an informed decision. Here are some key considerations:

  1. Have you waited at least 12 months? You cannot redeem I Bonds within the first 12 months of purchase. If you redeem them within the first five years, you’ll forfeit the last three months of interest.
  2. What is the maturity date? I Bonds have a 30-year maturity period, but you can redeem them after holding them for at least 12 months. However, it’s often more advantageous to wait until the five-year mark to avoid the penalty.
  3. What is the current interest rate? I Bonds earn interest based on a fixed rate and an inflation rate that changes every six months. Check the current interest rates to assess whether they are competitive with other investment options. If the rates are attractive, it might be worth holding onto your I Bonds.
  4. What are your financial goals? Consider your financial goals and the purpose for which you purchased the I Bonds. If you bought the bonds for a specific purpose, such as a down payment on a house, consider whether redeeming them will accomplish that purpose.
  5. What are the tax implications? Interest earned on I Bonds is subject to federal income tax but is exempt from state and local taxes. 
  6. Is inflation a concern? I Bonds offer inflation protection, which can be valuable during periods of rising prices. If inflation is a concern, holding onto I Bonds might provide a hedge against it.
  7. What are the market conditions? Consider the overall economic and interest rate environment. If interest rates are expected to rise, you might want to hold onto your I Bonds, as they could become more competitive compared to other fixed-income investments.

If you’re unsure about whether to redeem your I Bonds, consider consulting with a fee-only financial advisor. They can provide personalized advice based on your individual financial situation and goals.

How do I redeem my I Bonds on TreasuryDirect?

  1. Access TreasuryDirect: If you purchased your I Bonds electronically through TreasuryDirect (the U.S. Department of the Treasury’s online system), log in to your account.
  2. Select the bonds to redeem: Once logged in, click the ManageDirect tab at the top of the page. Under the heading Manage My Securities, click “Redeem securities”. On the Redemption page, choose the button beside your Series I Savings Bond and click “Submit”. On the Summary page, check the box beside each bond that you want to redeem and click “Select”.
  3. Provide redemption details: On the Redemption Request page, leave the default button selected for Redeem full amount. Note: If you only want to make a partial redemption, select the button for Redeem partial amount and enter the amount you want to redeem. You must redeem at least $25 and leave at least $25 in the bond. From the drop-down box, select the destination bank account for your redemption proceeds. Click “Review”.
  4. Verify Information: Double-check all the details before confirming the redemption. Ensure that the information provided, such as bank account details, is accurate.
  5. Confirm Redemption: The Redemption Review page is then displayed. If any information needs to be changed, click “Edit” and make the changes. Otherwise, click “Submit”.  The funds will be electronically deposited into the bank account you specified.

How do I redeem paper I Bonds?

If you hold paper I Bonds, the process is a bit different:

  1. Fill out the FS Form 1522: Obtain and fill out FS Form 1522, available on the U.S. Department of the Treasury’s website. 
  2. Sign and mail: Sign the form and mail it to the address specified on the form. Include the paper bonds you want to redeem.
  3. Receive the funds: After your request is processed, you will receive the funds via direct deposit if you provided banking information or by check.

Should I invest in I Bonds in 2024? 

The current inflation interest rate of 4.28% may make I Bonds an attractive investment for some. However, it’s important to note that the actual rate you’ll receive may be lower, factoring in the forfeiture of three months’ worth of interest. While I Bonds offer a guaranteed investment to safeguard your cash from inflation, they may not suit every investment portfolio.

Before diving into I Bonds, consider exploring alternative short-term investment options.

If you want help with your finances and are interested in having a comprehensive financial plan, feel free to schedule a discovery call with one of our financial advisors today!

Please note, for compliance reasons, we are unable to provide financial or investment advice during this call.

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.

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District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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