If you have followed my posts and purchased series I savings bonds over the past couple of years, it is time to start thinking about redeeming them. This is because interest rates on them have been resetting lower to about 3.4%, which is now lower than the rate on many high yield savings accounts.
Series I bonds are not good long-term investments because they only earn the rate of inflation. While you will keep up with inflation, you are not growing wealth in real terms. The long-term historical inflation rate in the U.S. has averaged about 3%. This means that I bonds purchased over the past few years (which have no fixed interest rate component) will likely only yield 3% over the long-term. They were a good short-term investment last year because they were paying 9.6% risk-free for a while, but with inflation moderating it is time to think about redeeming them.
Whether you should redeem your I bonds now depends on the specific month you purchased them in. You must hold I bonds for at least a year before you can redeem them. Further, when you redeem I bonds before 5 years, you forfeit the most recent 3 months of interest. The key is to let three months pass after the rate resets lower so that you are forfeiting 3 months of low-rate interest and not high-rate interest.
If this sounds confusing, fortunately there is a three step test to help you identify when to redeem your series I bonds.
Step 1: Check to see if the rate has reset lower
Log into Treasury Direct, go to “Current Holdings” and view the details of your I bonds. Check to see if the interest rates have reset lower. If the rate is still high (such as the 6.48% bond in the example below), you can stop right here. You’ll want to hold onto these bonds for now. If the rate has reset lower (such as the 3.38% bonds), continue to step 2.
Step 2: Figure out the date of last reset
For bonds that have reset to a lower rate, you’ll want to figure out when the rates last reset. Interest rates on I bonds reset every six months from the month of issuance. For example, the bond that was issued on 11/1/20 will reset every November and May. Since it is August as I write this, the last reset is May. For the bonds that were issued in January, the last reset was in July. Once you know when the rates last reset on a bond, continue to step three.
Step 3: Figure out when to redeem the bond
For bonds that have reset to a lower rate, take the most recent interest rate reset month and add 3 more months to figure out the optimal redemption month. For the bond issued 11/1/20, take the last reset month of May and add 3 months to arrive at August. So I would redeem those bonds now. For the bonds issued in 1/1/22, adding three months to the last reset month of July yields October 2023. I would wait until October before redeeming those. You should do this calculation for each of your bonds to determine the optimal redemption month for each bond.
Of course, the most important thing when determining whether to redeem a bond is to ask how much you can earn in alternative investments. Right now, US Treasury bills offer a risk-free 5.5% rate, which is clearly superior to I Bonds at 3.38%. Over the next few months, I plan on redeeming all of my I bonds and reinvesting the proceeds either in US Treasury bills or in stocks as attractive opportunities arise.
There are some tax considerations to keep in mind as well. The good news is that I bonds are exempt from state income taxes so no impact there. For federal taxes, the interest on I bonds are typically deferred until you redeem them. The deferred interest becomes taxable in the year you redeem your I bonds. You should consult your tax advisor to understand the impact of realizing deferred interest on your overall taxes.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.
The information in the article is provided for informational purposes only. It should not be construed as investment advice or advice on buying, selling, or other types of transactions relating to an investment in products or services, much less an invitation, an offer or a solicitation to invest.
The information in the article is provided solely by virtue of the fact that everyone will independently make their own investment decisions: the report does not take into account investment objectives, nor specific needs or financial situation. In addition, nothing in the article represents or is intended to express investment, financial, legal, accounting or tax advice. You should consult your own investment or financial advisor before taking any actions.