I bonds were paying nearly 10% in 2022. It's time to sell.
Other risk-free investments are now paying higher returns.
The jury is in.
It’s a good time to sell those I bonds you bought when they became fashionable two years ago amid blisteringly hot inflation, which pumped up the annualized rate to 7.12% in November 2021 and a record 9.62% in May 2022.
The lofty annual rate has since settled as inflation has been tapped down, and the I bonds scooped up during those heady days are paying about a third of those beguiling rates, or 3.97%.
Here’s why: The I bond rate is made up of a fixed rate, which applies for the 30-year life of the bond, and a semiannual variable inflation rate calculated from the six-month change in the Consumer Price Index.
The annualized yield for the latest I bonds is 5.27% — a hefty fixed rate of 1.30%, plus the 3.97% variable rate, which will reset again in May.
By contrast, the I bond fixed rate in November 2021 and May 2022 — when inflation was soaring — was 0%. That means those older bonds are now earning the current variable rate, period.
The takeaway? Redeem and reinvest.
"I personally sold my own and am advising clients to do the same," Danielle Howard, a certified financial planner with Wealth By Design in Glenwood Springs, Colo., told Yahoo Finance. "Depending on individual cash flow considerations, we are looking at money markets, laddered CD's, and corporate bond bullets."
Read more: Learn more about high-yield savings, money market, and CD accounts.
Investing somewhere else certainly has a dollop of charm. Some certificates of deposit and high-yield savings accounts are paying more than 5%. The most appealing CD rates — offered mostly by online banks — were recently hovering above 5.5% for a one-year certificate, down a smidge from 5.87% in December, and some of the highest rates in more than two decades.
"I always recommend holding on to I bonds until you need the cash because they provide insurance against future inflation, even when the fixed rate is 0%," David Enna, founder of Tipswatch.com, a website that focuses on I bonds and TIPS, told Yahoo Finance.
"But in the last decade, we didn't have such attractive alternatives. For anybody with a short-term investment timeline — and most of the buyers in October 2022 were short-term investors — I bonds aren't as attractive now as other investments, like a 1-year Treasury at 4.82% or a 1-year CD above 5.0%."
To be clear, if you bought these bonds when they were their highest in 2021 and 2022, you have already been enriched. I bonds purchased in October 2022, for instance, would have earned 9.62% for six months and then 6.48% for six months. That’s an average one-year return of about 8.05%.
For long-term savers looking for a super safe investment, "I bonds are still attractive for a small portion of your portfolio," Eric Flett, a wealth adviser with Concentric Wealth Management in Lafayette, Calif., told Yahoo Finance.
There are a few rules to keep in mind if you are selling your old I bonds. While I bonds earn interest for 30 years or until they’re cashed in — whichever comes first — you can’t cash in until after one year.
If you want to cash out your I bonds bought at the peak, you’re clear.
But in general, I bond investors should plan to hold them for five years or longer. Otherwise, Flett said, "there is a significant haircut if you sell them sooner — you’ll lose the last three months of interest."
Read more: How to start investing: A step-by-step guide
What are I bonds? A refresher
I bonds are a type of US savings bond, debt securities issued by the US Department of the Treasury.
The main attraction of I bonds: They’re government-backed and guaranteed to keep pace with inflation because their return is tied to the Consumer Price Index, or CPI, the government’s official yardstick for consumer price growth.
New rates on I bonds are set every May and November by the Treasury Department. Because of the twice-yearly adjustments, the date you buy your I bonds determines your returns.
Investing in I bonds
The bonds can be purchased in allotments of $25 or more when you buy them electronically from the US Treasury’s website, TreasuryDirect, with no fee. Paper bonds are sold in five denominations: $50, $100, $200, $500, and $1,000.
Normally, you can’t buy more than $10,000 in I bonds each calendar year. There are a couple of ways to ramp that up. For instance, you can direct your federal tax refund to buy an additional $5,000 in paper I bonds.
The interest is typically free from state and local taxes. You might also be able to steer clear of federal income tax when you use the interest to pay qualified higher education expenses at an eligible institution or state tuition plan in the same calendar year you redeem the eligible I bonds.
One thing to consider: You could redeem those purchases from 2022 and reinvest that cash in new I bonds with a fixed rate of 1.3%. "A lot of my readers are doing that," Enna said.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of 14 books, including "In Control at 50+: How to Succeed in The New World of Work" and "Never Too Old To Get Rich." Follow her on X @kerryhannon.
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