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Understanding the New I Bond Rate Announcement
The U.S. Treasury recently announced that the interest rate for I bonds purchased between November 2023 and May 2024 will be 5.27% for the first six months. However, if you already own I bonds, your next six-month rate will be lower, as each bond’s rate is based on its issue date. For those who purchased I bonds between November 2021 and October 2022, the new six-month rate will be 3.94%. While I bonds previously offered high rates, today’s best CDs are paying even more, ranging from 5.00% to 6.50% APY. If you’ve held your I bond for at least a year, it may be worth considering moving your funds to a better-paying CD. The optimal time to cash in your bond depends on its issue date, with 15 months being the sweet spot for many 2022 bond purchasers.
The Two Components of the I Bond Rate
I bonds get their name because their interest rate changes every six months based on inflation rates. The rate is composed of two parts: a fixed rate assigned at the time of purchase and an inflation component that adjusts every six months. The sum of these two components determines the composite rate for each six-month period. The new rate announcement includes a higher inflation component of 3.94% and a higher fixed-rate component of 1.30%. This explains why new I bonds purchased today will have a higher rate of 5.27% for the first six months, compared to 2022 I bonds with a rate of 3.94%.
Variations in Composite Rates
Due to different fixed rates assigned to each group of I bonds at the time of purchase, the six-month composite rates vary over time for different bond issue dates. The table below illustrates the composite rates for various bond issue dates:
| I Bond Issue Date | Fixed-Rate Assigned for the Life of the Bond | Current Inflation Component | Today’s Composite Rate* |
|---|---|---|---|
| Nov 2023 – May 2024 | 1.30% | 3.94% | 5.27% |
| May 2023 – Oct 2023 | 0.90% | 3.94% | 4.86% |
| Nov 2022 – Apr 2023 | 0.40% | 3.94% | 4.35% |
| May 2022 – Oct 2022 | 0.00% | 3.94% | 3.94% |
| Nov 2021 – Apr 2022 | 0.00% | 3.94% | 3.94% |
Consider Moving Funds to High-Yield CDs
If you don’t need immediate access to your funds, it might be advantageous to cash in your I bonds and invest in high-yield certificates of deposit (CDs). CD rates are currently at record highs, with APYs ranging from 5.00% to 6.50%. By locking in these rates for months or even years, you can potentially earn more than with I bonds. Keep in mind that CD rates are fixed for the CD’s full term, so you don’t have to worry about rate fluctuations. Additionally, you may also consider high-yield savings accounts or money market accounts, which offer rates as high as 5.40% and 5.35% APY, respectively. However, be aware that rates for these accounts can change at any time.
Choose Your I Bond Withdrawal Date Wisely
If you’ve held your I bond for at least a year, you have the option to withdraw your funds. However, there is a penalty if you cash out within five years of the bond’s issue date. The penalty is calculated as the last three months’ worth of interest, and the amount depends on the rate at the time of withdrawal. To minimize the penalty, it’s recommended to wait until you’re three months into a lower-rate period before cashing out. A good strategy is to withdraw shortly after the first of the month to maximize your interest earnings. For bonds purchased between May and October of a previous year, the optimal withdrawal time is typically around the 15-month mark, while for bonds purchased between November and April, it’s around the 21-month mark. By timing your withdrawal carefully, you can minimize your penalty and potentially earn a better return elsewhere.
