Why did I bonds become popular during 2022?
In 2022, I bonds came to the attention of many investors due to an extraordinary spike in inflation that translated to a guaranteed return of 9.6%. However, since I bonds reset their rates based on inflation every six months (May and November), the rate has now dropped to 1.9% for bonds purchased at the 2022 peak.
Can I redeem my I bonds?
I bonds are issued with a 30-year maturity, but investors are able to redeem their bonds any time after a 1-year holding period. If redeemed before 5 years, investors lose the equivalent of three months of interest.
What is the current rate on new I bonds?
New I bonds issued as of this month (November 2024) have a 3.11% yield, continuing the decline in yields, coming off the most recent rate of 4.28%.
How do I bond rates work?
I bonds have two components: a fixed rate and a variable rate tied to inflation. The fixed rate is set at purchase and remains for the bond’s life, while the variable rate adjusts every six months with inflation. Bonds purchased around the inflation peak in 2022 were issued with a 0% fixed rate, meaning their returns were solely based on inflation adjustments.
Should I redeem my old I bonds and buy new ones?
If you bought I bonds during the peak in 2022, it may be beneficial to redeem and purchase new bonds or reinvest elsewhere. The fixed component of the yield has moved higher (currently 1.2%) as the inflation component has declined. In this case, the loss of three months of interest will be recouped within seven months.
Is redeeming worth it if my I bonds are from many years ago?
For older I bonds with a smaller difference in the fixed rate, the payback from redeeming may still be beneficial, but it will take longer to offset the interest lost from the penalty.
Are there limits on repurchasing new I bonds after redeeming?
Yes. You’re limited to $10,000 in electronic I bond purchases per year. If you redeem older bonds to buy new ones, that amount counts against your annual cap, potentially limiting how much of your redeemed funds you can reinvest in new I bonds.
Are there better options for investing I bond proceeds?
Two reasons this might make sense. First, with current I bond rates at their lowest since 2021, you can lock in similar yields in current Treasury bonds. Yields on 2-year, 5-year, and 10-year Treasuries are 4.25%, 4.2% and 4.3%, respectively. Second, for many investors, I bonds are an outlier holding in terms of not being consolidated with your other investments and having to purchase from the Treasury Direct website. Being off the radar for most investors, it is easy to lose track of current yields. Even if the intent is to own I bonds for an extended period of time (5 – 20 years), it still makes sense to periodically compare with other fixed income options.
Do I bonds have tax benefits?
Yes. Interest on I bonds is exempt from state and local taxes. You’ll only pay federal tax when you redeem them. Plus, you may avoid federal taxes if the redemption funds are used for qualified higher-education expenses, subject to income limits.
Are there risks in redeeming my bonds to buy new ones?
If you plan to hold the new bonds long-term, you will likely come out ahead. But if you redeem old bonds, buy new ones, and then redeem again after only a year, you will incur two successive penalties, reducing the expected benefit from these securities.
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