Are you thinking about investing in I bonds, but have heard that their rates have dropped from 9.6% to 4.3%? While this may seem like a huge drop, investors who buy I bonds today will do better in the long run. Here's why.
How do I bonds work?
I bonds are 30-year savings bonds issued by the U.S. Department of Treasury. With I bonds, you earn interest based on a combination of a fixed rate and an inflation rate calculated twice a year. The fixed interest rate remains constant, while the variable rate changes to match the current inflation rate.
Both the fixed rate and variable rate are updated each May 1 and Nov. 1. Once you purchase an I bond, the fixed rate you received never changes. The variable rate, however, changes every six months based on the Consumer Price Index (CPI), which is the most widely used measure of inflation.
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These bonds can only be purchased through the Treasury Direct website. Unlike other bonds, you can't buy or sell I bonds through a typical brokerage firm. Purchase prices start at $25, and you can buy in any amount above that up to $10,000 per person, per year.
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than five years, you lose the last three months of interest.
What are the benefits of I bonds?
I bonds offer a unique way to protect the purchasing power of your money against inflation. This means your investment will maintain its purchasing power over time. They are also backed by the U.S. government, ensuring that they're a low-risk investment.
I bonds are guaranteed to never lose value, which makes them an ideal alternative to stocks or riskier assets. They can also be purchased in small amounts, starting at $25, which makes them accessible to virtually anyone.
I bonds earn interest for up to 30 years, and the interest is exempt from state and local taxes. The interest for federal income taxes are tax-deferred until the bond is redeemed.
Why today's 4.3% I bond is better than last year's 9.6%
But why is the 4.3% I bond a better investment choice than last year's 9.6% bond? The answer lies in the fixed interest rate. While the 9.6% bond may seem attractive at first glance, it has a 0% fixed interest rate, which means that buyers will only earn interest based on inflation rates.
As of May 1, the fixed rate on I bonds was set at 0.9%, reaching its highest level in 15 years. This is an increase when compared to the preceding Nov. 1, 2022 reset, which was 0.4% and 0%, from May 2020 to October 2022.
With the current variable interest rate at 3.4%, those who purchased an I bond at 9.6% last year will see a significant drop in returns. However, buying an I bond today guarantees a 0.9% fixed rate on top of the 3.4%, resulting in a 4.3% return for the next six months.
Those who bought the 9.6% will only be getting the variable interest for the next 29 years. However, those who purchase an I bond today are guaranteed to always get a yield that is 0.9% higher than those who bought a year ago.
Investing in I bonds can be a smart way to earn extra income while protecting your money against inflation. The current fixed rate of 0.9% is the highest in the past 15 years, and it makes investing in these bonds a much better option than last year's I bonds with a fixed rate of 0.0%. Make sure to stay informed about the current fixed rates on I bonds to make the best investment decision. When comparing bonds, don't just compare the interest rates -- it's essential to know how bonds work and find one that best fits your needs.
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FAQs
The answer lies in the fixed interest rate. While the 9.6% bond may seem attractive at first glance, it has a 0% fixed interest rate, which means that buyers will only earn interest based on inflation rates. As of May 1, the fixed rate on I bonds was set at 0.9%, reaching its highest level in 15 years.
Are I bonds still good investment? ›
I bonds issued from May 1, 2024, to Oct. 31, 2024, have a composite rate of 4.28%. That includes a 1.30% fixed rate and a 1.48% inflation rate. Because the U.S. government backs I bonds, they're considered relatively safe investments.
Why is my bond worth less? ›
There are two primary reasons a bond might be worth less than its listed face value. A savings bond, for example, is sold at a discount to its face value and steadily appreciates in price as the bond approaches its maturity date. Upon maturity, the bond is redeemed for the full face value.
Should I buy I bonds now or wait until May 2024? ›
At an initial rate of 4.28%, buying an I bond today gets roughly 1% less compared to the 5.25% 12-month Treasury Bill rate (May 1, 2024). You could say that buying an I Bond right now is a 'fair deal' historically compared to 2021 & 2022 when I Bond rates were much higher than comparable interest rate products.
Should I cash in my bonds now? ›
Remember, when you cash out your I Bonds you don't earn the interest until you complete the month and that you lose the prior 3 months' interest. If you want to keep all your good interest and get the most out of your I Bonds you should cash out: after earning 3 months of lower interest and.
What is the downside to buying treasury bonds? ›
These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered.
What is the Ibond rate for 2024? ›
The composite rate for I bonds issued from May 2024 through October 2024 is 4.28%.
Will savings bonds become worthless? ›
If a bond is held past its maturity, the federal government remains responsible for the debt. However, savings bonds that are held past their maturity date do not continue to earn interest and may actually lose value due to inflation.
Can you lose money on bonds if you hold them to maturity? ›
After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.
Why am I losing money on municipal bonds? ›
Municipal bonds, like all bonds, pose interest rate risk. The longer the term of the bond, the greater the risk. If interest rates rise during the term of your bond, you're losing out on a better rate. This will also cause the bond you are holding to decline in value.
Series I bonds will pay 4.28% annual interest from May 1 through October 2024, the U.S. Department of the Treasury announced Tuesday. Linked to inflation, the latest I bond rate is down from the 5.27% annual rate offered since November and slightly lower than the 4.3% from May 2023.
Is there a best time to buy bonds? ›
Investing in bonds when interest rates have peaked can yield higher returns. However, rising interest rates reward bond investors who reinvest their principal over time. It's hard to time the bond market. If your goal for investing in bonds is to reduce portfolio risk and volatility, it's best not to wait.
How much is a $100 savings bond worth after 20 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 20-Year Value (Purchased May 2000) |
|---|
| $50 Bond | $100 | $109.52 |
| $100 Bond | $200 | $219.04 |
| $500 Bond | $400 | $547.60 |
| $1,000 Bond | $800 | $1,095.20 |
You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent. Only certain qualified higher education costs are covered, including: Tuition.
What month should I cash in savings bonds? ›
You can get your cash for an EE or I savings bond any time after you have owned it for 1 year. However, the longer you hold the bond, the more it earns for you (for up to 30 years for an EE or I bond). Also, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.
How much is a $50 Patriot bond worth after 20 years? ›
After 20 years, the Patriot Bond is guaranteed to be worth at least face value. So a $50 Patriot Bond, which was bought for $25, will be worth at least $50 after 20 years. It can continue to accrue interest for as many as 10 more years after that.
Is now a good time to invest in Series I bonds? ›
The annual rate for Series I bonds could fall below 5% in May based on inflation and other factors, financial experts say. That would be lower than the current 5.27% interest on I bond purchases made before May 1, but higher than the 4.3% interest offered on new I bonds bought between May 1, 2023, and Oct. 31, 2023.
What's the downside of I bonds? ›
Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
Is there a better investment than I bonds? ›
Bottom line. If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you're saving for education, I-bonds may be the way to go.
How long should you keep money in an I bond? ›
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
