First rule of I Bonds: Don’t rush to sell your I Bonds

I Bonds have a 30-year term, but you can sell them any time after 5 years with no penalty. My suggestion: Hold them until you really need the money.

By David Enna, Tipswatch.com

The I Bond’s new inflation-adjusted variable rate — a gaudy 7.12% for six months — is bringing a lot of fresh interest to these inflation-protected Savings Bonds. With all the media coverage, some investors have questions. Such as this one from a reader:

“I purchased I Bonds in 2011. Do you think I should sell those and purchase again or leave them as it is? I don’t want to increase my bond portfolio more than where it is.”

This very common question is understandable, but it comes from a basic misunderstanding of how I Bonds work — and after all, 95% of Americans have no idea how I Bonds work.

The new variable rate everyone is talking about — 7.12% for six months — applies to all I Bonds ever issued, not just the newly minted November 2021 version. Every I Bond is going to earn at least 7.12%, annualized, for six months, after the current variable rate of 3.54% ends its six-month term. So there is no reason to sell old I Bonds to buy this new November version, and in fact, there are good reasons not to sell I Bonds to buy the new one.

When the 7.12% variable rate kicks in will depend on when the investor bought the I Bond. Here is the schedule from TreasuryDirect:

(One confusing thing about this chart, however: I Bonds that are less than 5 years old will be listed on TreasuryDirect’s site and the Savings Bond Calculator without the latest three months of interest. TreasuryDirect notes: “When looking at changes in values for these bonds, rate changes will seem to be delayed by three months.” This confuses and frustrates a lot of investors.)

Why redeeming early can be a mistake

The reader who posed the original question purchased I Bonds in 2011. Through that entire year, I Bonds got a permanent fixed rate of 0.0%, exactly where it is now. So the value of this I Bond has grown about 20.9% over the last decade. With a $10,000 investment, the value is now about $12,090, roughly.

As I noted, there is no benefit to redeeming those 2011 I Bonds to purchase I Bonds in November 2021. The fixed rate remains at 0.0%, and all I Bonds will get the 7.12% variable rate for six months..

The big problem with redeeming early is that the interest earned will be immediately taxable as income on the investor’s federal tax return. The hit on $2,090 interest would be a tax of about $460 for someone in the 22% tax bracket.

To sum up: No benefit, with a cost of $460. Don’t redeem older I Bonds to purchase new ones in November 2021.

When does redeeming make sense?

I Bonds were first issued in September 1998 and those earliest ones won’t mature until September 2028, so maturing I Bonds are not an issue. (FYI: I Bonds issued in 1998 carry a fixed rate of 3.4% and will now be earning a composite rate of 10.64% for six months. Definitely hang on to those.)

My one premise for redeeming I Bonds is this: Don’t do it, until you really, really need the money. Because of the $10,000 per person per year purchase cap, it takes years to build up a sizable cache of inflation-protected I Bonds. If you redeem $10,000 in I Bonds, the purchase cap still applies, so your holdings can’t grow in that year.

Obviously, it doesn’t make sense to redeem I Bonds right now — for any reason — with a very generous interest rate taking effect for six months. And inflation could continue at a high rate well into 2022. Now is a great time to own I Bonds, not to sell them.

In the future, if you do need the money and decide to redeem:

  1. Redeem I Bonds you have held 5 years or longer, to avoid losing three months of interest.
  2. If the current variable rate is high — like it is now — let that rate run its six-month course before redeeming.
  3. Redeem I Bonds with a 0.0% fixed rate before any others. A higher fixed rate is always preferable. If you have been buying I Bonds for many years, you certainly have issues with 0.0% fixed rates. Redeem those first.

However, figuring out which I Bonds have a 0.0% fixed rate can be confusing, because the TreasuryDirect site will show you the issue date and the current interest rate, but not the fixed rate. The current interest rate can be confusing, because of the month-by-month rolling dates for interest rate changes. For example, your holdings right now might show interest rates of 3.54%, 3.64%, 4.05%, 3.74%, 7.12%, 7.22%, 7.43%, and so on. The ones with interest rates of 3.54% and 7.12% definitely have a fixed rate of 0.0%.

To sum up: Don’t be redeeming any I Bonds right now. Eventually, when you do redeem, carefully examine your holdings and redeem those with fixed rates of 0.0%.

Does it ever make sense to redeem I Bonds to buy new I Bonds?

Yes, I think so, under these circumstances:

  1. The new I Bonds have a substantially higher fixed rate than the I Bonds you will be redeeming. And then, even if that is true, only redeem if ..
  2. You need to raise the cash to buy the new, higher-rate I Bonds. Redeeming 0.0% I Bonds to purchase 0.5% I Bonds (which was possible from November 2018 through October 2019) makes sense if you have no other tax-efficient way to raise the cash.

I did this sort of rollover during that 2018 to 2019 stretch, unloading I Bonds with a 0.0% fixed rate to grab the new 0.5% fixed rate. That meant 1) my overall holdings did not increase in those years, and 2) I owed some taxes on the redeemed interest. Now, with that 7.12% interest pouring in, I guess I should have just held on and found the cash elsewhere.

Oh well, lessons learned.

* * *

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
This entry was posted in I Bond, Savings Bond. Bookmark the permalink.

30 Responses to First rule of I Bonds: Don’t rush to sell your I Bonds

  1. David says:

    If I sell iBonds before maturity, do I get my principal back? Or do I get the current price of the iBond? (I know with TIPS, the price of the TIPS changes with the market, and can lose value more than the inflation-adjusted dividend gain)

    • Tipswatch says:

      You can’t redeem I Bonds for one year. If you sell before five years, you lose the last three months of interest. Beyond that, you can never lose a penny of principal or accumulated interest with an I Bond.

  2. Larry Reeves says:

    If I make a single I bond purchase of $1000 after 1 year if I want to redeem do I have to redeem $1000 or can I redeem in lesser amount?

  3. Maurice says:

    Thanks for the I Bond info. I have some EE Bonds, should these be cash-in for I Bonds or hold off?

    • Tipswatch says:

      It’s impossible to say because EE Bonds come in many forms. I have some issued in 1992 that are still paying 4% interest, so I am hanging on to those until maturity in July. More current EE Bonds pay a small interest rate but double in value if held for 20 years. So if you’ve had these for 12 or 15 years, you should probably hold them until they double.

  4. Len says:

    The second rule might be don’t count your redemption money ignoring taxes. I have I bonds from 2000 that are going to generate some whopping income taxes. I may redeem some a year early to avoid tax bracket creep. Being taxed on inflationary gains seem a bit unfair, as always.

    • Tipswatch says:

      Planning for future taxes (and Medicare surcharges) is important. At this point, no I Bonds ever issued have matured, but that will begin happening every year after 2028, for people lucky enough to have bought in those early years. I have EE Bonds I bought in 1992 maturing this year, and I’ve been including that “windfall” in my income planning this year. Investors should definitely plan when to cash in on that tax-deferred money.

      • Len says:

        One never knows. In the fall of 1999 professor Roger Kaufman of Smith College had a letter published in the Wall Street Journal pointing out that, at that time, a retiree could fund a 30 year retirement using TIPS with a SWR of 4% real. And still have his original capital intact if they were in a tax-sheltered account. I send him a Christmas card each year.

  5. Kevin says:

    David, in your next blog about selling I-bonds, you may wish to discuss how to game the system with regard to $4 incremental rounding. There is a good discussion here:
    https://www.bogleheads.org/forum/viewtopic.php?t=368049

    • Tipswatch says:

      I have been following these discussions but no … it’s just $4 and it all balances out over time. No one should be in a rush to sell I Bonds anyway. I did learn the interest payments are based on $25 increments, something I would have rather not known!

  6. Jean Malone says:

    Will I be notified when my I bond rate is changed and also when I reach the Maturity of the bond?

    • Tipswatch says:

      No, you won’t get any notification when the I Bond rate changes. The changes occur in six-month intervals based on the date of your purchase:

      Issue month of your bond New rates take effect
      January January 1 / July 1
      February February 1 / August 1
      March March 1 / September 1
      April April 1 / October 1
      May May 1 / November 1
      June June 1 / December 1
      July July 1 / January 1
      August August 1 / February 1
      September September 1 / March 1
      October October 1 / April 1
      November November 1 / May 1
      December December 1 / June 1

      No I Bond has ever matured, so I am not sure if you would get any notification at maturity. But I suspect you won’t.

  7. David says:

    People who redeem for qualified educational expenses may be an exception to your rule though? It is a way to get money for college and not pay the tax for those who meet the income threshold.

    • Tipswatch says:

      Yes, this is an excellent way to use (and plan to use) I Bonds. And paying for college expenses qualifies as a time when you “really, really need the money.”

    • Liz says:

      If you own a 529 account for you child and the bonds are in your name, you can roll the bonds into the 529 right before paying college expenses. This negates paying taxes on the earned interest, and allows that money to be used for dorm fees also. Or housing fees equal to what the school would charge.

  8. DW says:

    I redeemed multiple I Bonds in May 2019 when 5 year CDs were in the 3-3.5% range while the I Bond inflation rate was just 0.7%. seemed like a straightforward decision to shift those funds toward CDs at that time. Recently though, it’s looking more competitive as to which will prevail over that 5 year term with CPI-U having now increased by 7.91% over the ensuing 2.5 years.

    • Tipswatch says:

      I was also buying 5-year CDs in the 2.5% to 3.5% range, and I like combining those with I Bonds and TIPS. Those provided great deflation protection. Now those CDs are in the 1% range, maybe 1.25% if you are lucky. No longer attractive.

  9. Vincent Winters says:

    Your generously shared knowledge is greatly appreciated. Thank you.

  10. Myles Gordon says:

    The Treasury should remove the Limit on Consumers who puchase I Bonds. We are supporting the United States Government.

  11. Len says:

    Always sound advice, and timely as well. You won’t get this sort of information from your mutual fund or broker.

  12. Maurice Fitzgerald says:

    Great story on I savings bonds. I’m holding some low interest, below one percent EE bonds thats over five years old. I’m thinking of cashing in and buying I bonds or three year credit union certificates.

  13. Steven says:

    I did exactly the same thing in 2019, unloading older I Bonds with a 0.0% fixed rate to grab the new 0.5% fixed rate. Because I held them a little over 5 years, there was no 3 month penalty for cashing in early. So now the rate of these bonds will be around 7.62%. Cannot beat that rate.

  14. Tim B says:

    If you’d like to check your fixed rate on TreasuryDirect, scroll down on this page:

    https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#fixed

    They also have a PDF you can download on that page.

  15. Paul M. says:

    My wife & I each purchased the max. allowed of “paper” I-Bonds in ’01, ’02, ’03 & ’06, $240k. Our aver. fixed return is 1.9%. I loaded most, but not all, to Treasury Direct. I plan on redeeming some bonds early and not presenting some of the paper bonds, that I still hold, for redemption until “after” they mature in order to spread out the tax liability over 10 or 11 years to avoid paying tax at the higher tax bracket. Does this strategy make sense to you?

    • Tipswatch says:

      Be aware that federal taxes are due in the year the Savings Bond matures, not the year you redeem it, if you delay cashing them in. So you can’t avoid taxes by stretching out redemptions after the I Bond matures.

    • Tim B says:

      Yes, I’m probably going to have to do the same thing to try to avoid that Medicare surcharge.

  16. Clara Hickey says:

    Thank you so much for your valuable information. When I try to tell people about I Bonds, usually their eyes glaze over and you might as well go no further.

  17. Kevin says:

    95% – are you sure it’s that low? 😉

  18. I just learned a heck of alot more information about my I bonds. Thank you for the great information sir. You can’t beat the 7% rate thats for sure..

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