By David Enna, Tipswatch.com
Updated analysis … I Bond dilemma: Buy in April, in May, or not at all?
If you are a longer-term investor looking for ultimate safety and protection from inflation, you are going to want to buy U.S. Series I Savings Bonds in 2024, up to the $10,000 per person limit and possibly more.
That’s what I think. Not everyone agrees, such as this recent “Buy Side” article from the Wall Street Journal, which put forth the opposite opinion:
If you buy I bonds today, you could find yourself shackled to an investment with diminishing returns, says Aaron Brachman, a financial advisor in Washington: “I’ve never thought I bonds were a good place to park cash,” he says. … While I bonds will still keep you a step ahead of inflation, it’s obvious why their buzz has faded.
It’s no surprise to me that a financial adviser would criticize I Bonds. (No commissions, no fees, and they aren’t sexy.) But to understand why I Bonds remain attractive, even though the composite rate may slip lower, you have to understand how these investments work.
The basics
- The fixed rate of an I Bond will never change. Purchases through April 30, 2024, will have a fixed rate of 1.3%, which means the return will exceed official U.S. inflation by 1.3% until the I Bond is redeemed or matures in 30 years. That fixed rate is the highest in 16 years.
- The inflation-adjusted rate (often called the I Bond’s variable rate) changes each six months to reflect the running rate of inflation. That rate is currently set at 3.94%, annualized, for six months. It will adjust again on May 1, 2024, rolling into effect for all I Bonds, no matter when they were purchased.
- The current composite rate is 5.27% annualized for six months for purchases through April 2024.
For a longer-term investor (holding 5 years or more) the fixed rate should be the focus, because it is permanent. Getting a fixed rate of 1.3% above inflation is highly attractive, historically, especially when you factor in the benefits of I Bonds.
I Bonds are an extremely safe and conservative investment. Interest accrues monthly and principal can never decline, even in times of deflation. Investments are limited to $10,000 per person per calendar year for electronic I Bonds held at TreasuryDirect. There is also the option to get $5,000 a year in paper I Bonds in lieu of a federal tax refund. There is also a “gift box” strategy some investors use to stack purchases for future years.
I Bonds are a unique investment with many positives. For example, earnings are free of state income taxes and federal taxes can be deferred until the I Bond is redeemed or matures. Also, I Bonds are a simple investment to buy and track, much simpler than a TIPS with a constantly changing market value and inflation accruals that update daily.
But I can earn more elsewhere!
Yes, you can, and that is why short-term investors with a time horizon of 18 months or less should look elsewhere. Redeeming an I Bond held less than 5 years will trigger a penalty of the last three months of interest. That’s an obstacle for short-term investors, with the 13-week T-bill currently yielding 5.47% versus the I Bond’s 5.27%. Even the 1 year T-bill at 4.84% is attractive because it matures after one year with no penalty.
Also, the current 5.27% composite rate is likely to fall lower at the May 1 reset because inflation has been trending lower. The new composite rate could be closer to 3.0% to 4.0%, or even lower. Is that a disaster? Not really, but it’s not great for a short-term investor.
The long-term investor, however, should focus on earning 1.3% above inflation until redemption or maturity in 30 years. That is very attractive for an investment with ultimate safety and ease of ownership. Do you think in the next decade we could again see a period with safe interest rates close to zero? If that happens, I Bonds paying 1.3% above inflation will be performing well.
The buying strategy: Wait.
At this point of market trends, I think we will see both the I Bond’s fixed rate and variable rate fall at the May 1 reset. Mark this date on your calendar: April 10, 2024. At 8:30 a.m. ET on that day, the BLS will issue its March inflation report, setting in stone the I Bond’s new variable rate.
Variable rate. So far, the trend is not looking good for even a moderate variable rate, but things can change in the next few months, as shown in this comparison of non-seasonally adjusted inflation for this rate-setting period in 2022-2023:
I don’t think it’s likely we will see inflation ramp up this year the way it did in early 2023, but after a low number in December, non-seasonally adjusted inflation should perk higher from January to March. However, the end result of six-month inflation could be as low as 1.0%, creating a composite rate of 3.3%. That’s just a guess.
My contention is that for a long-term investor, the variable rate isn’t a crucial factor. It creates a six-month composite rate for a 30-year investment. The fixed rate of 1.3% is crucial. It is permanent.
Fixed rate. The Treasury tracks trends in real yields (specifically yields on Treasury Inflation-Protected Securities) to help determine each reset of the I Bond’s fixed rate. Real yields are down dramatically from the November 1 reset, with the 10-year real yield falling from 2.46% on Oct. 31 to 1.83% at Friday’s close, a drop of 63 basis points.
So, at this point, it doesn’t look likely that the I Bond’s fixed rate will rise on May 1. If 10-year real yields managed to hold around 1.8% through April, the fixed rate would probably fall to about 1.2%, still attractive. But the Treasury market is highly volatile right now. Nothing is certain as the market awaits actions by the Federal Reserve. It’s possible real yields could fall another 50 basis points by the end of April. Or rise? Who knows.
What this all means
I think it is highly likely that the best decision will be to buy your full allocation of I Bonds before the end of April, to lock in both the 1.3% fixed rate and 5.27% composite rate for a full six months. But there is no reason to rush that decision. An I Bond purchased in April gets exactly the same return as one purchased in January.
So there is time. Here’s what we will want to watch:
- Are real yields declining? In April, if you see 5- and 10-year TIPS yields falling to 1.5% or lower, you would definitely want to lock in the 1.3% fixed rate by buying in April. In fact, might want to use the gift box strategy to buy more, if you have a trusted partner for that transaction. My opinion: The gift box should only be used to lock in a high fixed rate, like the 1.3% currently in effect.
- Are real yields rising? Despite the Fed’s intention to begin cutting short-term interest rates this year, I’ve seen speculation from market “experts” that longer-term nominal rates could still rise, possibly to 6% on the 10-year Treasury note. Other experts, like bond king Jeffery Gundlach, see 3% as more likely. If 5- and 10-year real yields actually do rise by May to levels above 2.0%, it’s possible that we will see a higher fixed rate at the May 1 reset. I think that is unlikely, but by postponing your I Bond purchase to April you can get a better idea of what’s ahead.
- Is inflation declining? Lower inflation will cut the I Bond’s variable and composite rates, but that should not be a huge factor in this long-term investment decision.
The rollover strategy
If you are holding I Bonds with 0.0% fixed rates, you are currently earning a composite rate of 3.94%. You could redeem some of those now, park the cash in a money market account paying close to 5%, and then in April use that cash to buy I Bonds with a 1.3% fixed rate.
I generally encourage people to continue holding I Bonds “until you need the cash.” It’s great to have these savings bonds growing tax-deferred with zero risk. But this strategy of rolling over 0.0% I Bonds for a 1.3% fixed rate makes sense.
You will owe federal income taxes on the interest earned, and if your withdrawal is more than $10,000 (because of earned interest) you’ll only be able to buy $10,000 in new I Bonds in April. And if you held the I Bond less than 5 years, you will get hit with the three-month interest penalty, either at 3.38% or 3.94% or a combination, depending on your month of purchase.
The rollover strategy especially makes sense for people who are retired and have no way to raise cash for an I Bond purchase without selling an asset or withdrawing IRA money, both creating tax hits.
Reminder: When you redeem an I Bond, you earn zero interest for the month of that transaction. So the best idea is to redeem early in the month, like Jan. 2 or Feb. 2.
The TIPS alternative
For a savvy investor able to handle the complexity of investments in Treasury Inflation-Protected Securities, TIPS at this point are a “superior” investment to I Bonds because real yields are about 50 basis points higher. Plus, there is no purchase cap on TIPS or penalty for selling out early.
But TIPS are subject to market forces, rising and falling in value by the hour. In my opinion, they work best when held to maturity in a structured ladder providing inflation-protected cash for future needs. I Bonds have a flexible maturity so they can be considered more of a “cash equivalent” savings account and work well side-by-side with TIPS. And I Bonds aren’t subject to any market-price swings.
For some investors, TIPS are the preferred choice. For others, it is I Bonds. Or for people like me, a combination.
Conclusion
A lot of shorter-term, yield-hungry investors won’t see the appeal of I Bonds in 2024. That’s fine; there are great short-term options available right now. But longer-term investors interested in building a sizable reserve of inflation-protected cash will want to buy I Bonds in 2024, up to the limit.
But there is no hurry. Just mark your calendars for that April 10 inflation report.
What are your thoughts? Post your ideas and strategies in the comments section below. If you will bypass I Bonds this year, what alternatives are you considering?
• Confused by I Bonds? Read my Q&A on I Bonds
• Let’s ‘try’ to clarify how an I Bond’s interest is calculated
• Inflation and I Bonds: Track the variable rate changes
• I Bonds: Here’s a simple way to track current value
• I Bond Manifesto: How this investment can work as an emergency fund
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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. Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
Expanding on ReaderinCA comment 1/7/2024, when I became aware of I-Bonds in 2022, we purchased bonds for myself, wife, family trust, my sole proprietorship, set up (via $30 on line trust software) individual trusts for myself and wife and utilized the $5000 tax refund paper bond for a family total of $65,000 for the year. (extending into 2023 for the paper bond).
Is it possible you could update your prediction re: the fixed rate portion – what do you think the likelihood is that the fixed portion goes higher than 1.3?
I will be posting an updated analysis on Sunday morning. I don’t think the fixed rate will be higher than 1.3%, however.
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If you had to make a guess, what would you predict the I- bond fixed rate to be November 2024 ?
No one could make an accurate prediction for that long into the future.
Pingback: Let’s check in on the I Bond’s next fixed rate | Treasury Inflation-Protected Securities
Tipswatch —
Do you feel that there is a risk to stockpiling too many years worth of ibonds in your giftbox? I have 30k in my giftbox currently and would like redeem 40k worth of ibonds currently earning 0 percent and repurchase at the new rate. This would put 7 years worth of ibonds in my giftbox and I would be doing the same for my wife as well. I have no issue slowly transferring these over the next 7 years…but I do wonder if there’s a risk to amassing this much in my inbox that I’m overlooking. With the giftbox, your money’s locked up in a weird limbo and I wonder if the treasury I’m trying to figure out if the treasury could somehow change the rules midgame that would throw a monkey wrench into the works. Do you have any thoughts on this?
There are risks. 1) If the I Bond fixed rate rises in future years and stays high, you won’t want to deliver the 1.3% fixed-rate I Bonds in those years. So your 7 years keeps extending. Is this likely? Maybe not, but it’s hard to predict where future interest rates are heading. 2) 7 years would equal $140,000 of cash (even more growing with inflation) locked up and out of reach, except for the $20,000 a year you could deliver. So you’ll need to be certain you won’t need it.
I don’t think the Treasury will change the rules, at least for any gift-box I Bonds already created. It could stop the practice in the future, maybe. I have never used the gift box, but I am expecting I might to buy an extra set of the 1.3% fixed rate I Bonds in April. That decision will depend on where interest rates are trending by then.
Regarding the rollover strategy, why sell only hand your holdings and roll them over? If your fixed rate is zero why not sell s as lol of them snd roll them over to the ones with the higher fixed rate??
Some people are unloading all their 0.0% I Bonds. I wont … at least not yet. I might do two sets for a couple to allow two regular purchases and two gift-box purchases if the 1.3% rate appears highly likely to go down.
OK so if I have $10k in ibonds that I bought at the 0% fixed rate, I plan on ditching the entire $10k, but I will wait till April then.
@Tipswatch – thank you for all of the advice provided on your website. Question, please. If I unload $30k in I Bonds at 0.0%, once my wife and I purchase the $10k limit for 2024, can we gift-box purchase one other another $20k each to be gifted in 2025 and 2026? We are in our late 40’s and working to build a I Bond portfolio to hold for the next 30 years. Since I too think the 1.3% rate will likely go down, it seems to be prudent to sell the 0.0% I Bonds and pick up more 1.3%.
Yes, there is no limit on the amount you can place in the gift box. But only $10,000 can be delivered each year, completing the recipient’s cap for the year. How could this backfire? If the fixed rate rises substantially in future years, you would probably want to delay delivering the I Bonds until the rate was lower.
Tipswatch
The 1099s are available on the Treasury Direct website. Please let members know that when you cash IBonds and Paper Bonds converted to electronic IBonds, there are two different 1099s that you need to copy. I am surprised that Treasury Direct doesn’t merge all the IBonds into one 1099. FYI. I believe I had to click on the My Converted Bonds link before going to Manage Direct pull down, click on Manage My Taxes 2023 and then click on View 1099 for Tax Year 2023 to get Converted Bonds 1099.
Oh, good lord. I will be writing about the 1099s later this month. I had no idea this would happen because I haven’t (yet) converted paper I Bonds.
Ralph, I don’t have any converted bonds but am I correct that converting them involves creating a linked account for them on TreasuryDirect? I suspect you end up with a separate 1099 for each separate account, whether for a conversion, trust entity, etc.
I do not have alot of experience with Treasury Direct website. However, Treasury Direct created a separate account when I converted my paper IBonds. I believe you are correct when you say a separate 1099 will be created for each account.
I sold about $250-300K worth of low fixed rate I-bonds to buy TIPS over the course of the past 6 months, as soon as paying early withdrawal penalties was no longer an option and the variable rate was 3.38%.
Though I agree with Dave that there are definite advantages of I-bonds over TIPS, they did not, IMHO, justify accepting yields that were 1.5-2.5% lower than TIPS yields to maturity.
I did buy $20K of I-bonds at the end of December, 2023 at 1.3% fixed, and I intend to do the same at the end of April 2024 unless TIPS yields dramatically rise by then, or if the May I-bond fixed rate will be higher than 1.3% (which I consider unlikely).
One other question: is it possible, for tax planning purposes, to redeem part of an IBond in one year and the remainder in a second year? Thanks very much. Regards, Patricia F
You can redeem a portion of an electronic EE or I savings bond on Treasury Direct. The redemption will be a proportional amount of the principle and interest, and you will owe tax on the interest portion in the year it is redeemed. At least $25 must remain in the bond after a partial redemption. A paper bond cannot be partially redeemed.
https://www.treasurydirect.gov/savings-bonds/cashing-a-bond/
Thank you!
I’ confused by this sentence from the article: “It will adjust again on May 1, 2024, rolling into effect for all I Bonds, no matter when they were purchased.”).
“…The inflation-adjusted rate (often called the I Bond’s variable rate) changes each six months to reflect the running rate of inflation. That rate is currently set at 3.94%, annualized, for six months. It will adjust again on May 1, 2024, rolling into effect for all I Bonds, no matter when they were purchased.
The current composite rate is 5.27% annualized for six months for purchases through April 2024.
My confusion is this: If, on April 10, 2024, the BLS issues a March inflation report of 0% (setting I Bond’s new variable rate to 0%) and I were to purchase I bonds in April, 2024:
1) Will I get the current composite rate of 5.27% annualized for six months (with 1.3% fixed rate for the life of the bond) until the new inflation report later that year or;
2) On May 1, 2024 will I get 1.3% fixed for six months until the new inflation report?
You clearly write that “…I think it is highly likely that the best decision will be to buy your full allocation of I Bonds before the end of April, to lock in both the 1.3% fixed rate and 5.27% composite rate for a full six months…,”
Thus it seems clear from the article that if I buy in April that I’d get 5.27% annualized until the next reset but was confounded by statement, “It will adjust again on May 1, 2024, rolling into effect for all I Bonds, no matter when they were purchased..”
If the variable rate is 0.0% on the next reset, and you buy in April instead of May, you will receive 5.27% for six months and then 1.3% for six months. So yes, the variable rate rolls into effect for all I Bonds, but the start date depends on the original month of purchase. Whenever you buy an I Bond, you get the current composite rate for a full six months, then then next rate for six months, and so on.
One thing to consider … if the variable rate is negative, such as -0.4%, then you would receive 0.9% for the future six months, not 1.3%. The fixed rate will be reduced by a negative variable rate. But the composite rate can’t go below zero.
This is something I never realized. I assumed incorrectly that you would always get the fixed rate, no matter what the variable rate was. Thanks for pointing this out.
You’ve become quite the authority! Kudos!
https://finance.yahoo.com/news/i-bonds-were-paying-nearly-10-in-2022-its-time-to-sell-155656769.html
I talked with Kerry Hannon earlier this week. Thanks for this link.
Another advantage of both I-Bonds, at least in Missouri, is that State income taxes actually go down when you redeem them. Not only are they not subject to state income tax, but for Missouri AGI of $125,000 or less, they result in a bigger Federal income tax deduction on the Missouri income tax return (Form MO-1040, Line 13).
I’ve learned so much from this website! I’ve been buying TIPS in my non-taxable accounts for the last 2 years. I’m thinking of buying the upcoming 10-year TIPS in my taxable account. I don’t mind paying taxes on the “phantom income”. But what if there is a year with deflation, do you get a “credit” for that year, or is there simply nothing to report (other than the coupon payments)?
Also, when the TIPS matures, is there any complicated tax reporting? For example, do I need to save the amounts of the yearly inflation accruals and do any special reporting at the end? I do my own taxes so I like to keep it simple.
Thank you!
I do believe that if you experience a deflationary year, you will see a negative number reported on the 1099-OID. This is rare, but I have seen it in the past. That negative number would be applied against any positive interest you had earned in that year. When the TIPS matures in a taxable account, there isn’t a whole lot of tax consequence, just the last coupon payment and any inflation accrual for that year, up to the maturity date.
Good morning David. I’m still struggling to figure TIPS out. I just found one with maturing in 12 months (Jan 2025) YTM of 3.14% (CUSIP 912810FR4). A 1-year T-bill is paying 4.82% today, so the breakeven inflation rate is 1.68% – can that be right?
That particular TIPS has a coupon rate of 2.375%, which must be a bit below market value for a 1-year TIPS, but it also carries an inflation index of 1.63117, which means you will be buying 63% extra principal. I think that huge amount of extra principal — subject to deflation risk — could be affecting the real yield to maturity. Hard to say if it is a “great deal”; the risk is deflation setting in for even a few months of 2024.
David, thank you for this article, data summary, and points to consider when purchasing I bonds this cycle. Will definitely wait till April now and hopefully you can share thoughts on the BLS summary in April. Are you planning to share thoughts on the Jan 18, 10-yr TIPS possible fixed rate after Thursday’s CPI data release? I’m new to TIPS, in retirement, and picked some for the first time in October for the 5-yr auction. Thanks again for sharing your insight.
I will be posting a preview article on the Jan. 18 TIPS auction on Sunday morning, Jan. 14. Of course, I will also be posting an analysis of the December CPI report on Thursday morning.
I am sorry that my question out of context.. but since this site probably has the most TreasuryDirect user around here, maybe someone will have similar experience before.
I have 3 T bills matured last week but only one deposit shows up in my bank account. All my previous transactions usually deposit within 1-2 biz day after matured but this time a 1/2/2024 matured bill is still no show and another 1/4/2024 also missing so 1 out of 2 matured bond got deposited.
My bank account have not be changed for the last 10 months and I never has any issue before. I also have redeemed 7 iBond last week and they all got deposited without any issue.
I already email TD on the issue, just wondering whether anyone ever has an issue on missing deposit from TD.
Thanks!
update:
One T-Bill deposit show up yesterday 1/8/2024, I suspect this is the one matured on 01/04/2024. So I am still missing one matured T bill from 01/02/2024.
Check your Certificate of Indebtedness in Treasury Direct. It’s possible that you had it mature into the C of I instead of your bank account
Thanks for the comments. The matured bond did get payout from and shown in payment history.
I was being ping pong around the Bank/TD on getting the trace number and at first TD told me they don’t have that… etc, but after a few calls (3 or 4) , Finally someone points me to where I can find that.
It is in the history >> Payment History and if you look into detail of transaction. there’s a field “Trace Number”, it is there for each transaction but the number is the same for all the transactions. Well at least now I have something to give back to the bank to investigate.
Then I call back to the bank.. a lady pick up and took me a while to explain this laddering thing and while they are so many deposit from TD yet I know one transaction is missing.
She took the Trace number then after I few minutes she comes back and try to told me the she can’t match the number with anything on the transaction etc and imply that “nothing she can do”
I am pretty upset at this point since the trace number is what they always asked for to start an investigation…I told her that I have called a few time and everyone at their bank told me to get a trace number so they can start look into it… long story short after I told her how disappointed I am with the bank etc…
She put me back on hold for a few more minutes
She come back apologizing and tell me they have an internal team took over my case and start investigation on the issue.
Frankly I have the CFPB website opened if she tell me she is not going to do anything.
Well now at least everyone will know where you can get the Trace Number if such unfortunate ever event happens to you.
What you need is a different bank, inconvenient tho it may be to change. I once had a very similar problem myself and that was my remedy. Some of these people act as tho they are doing you a favor holding your funds. F____ Them.
Maybe that one bill wasn’t set up to sweep to your TD account at maturity, but rather sweep to the 0% C of I ??
I presently have I bonds at 0 percent fixed rate and plan to cash in as a result. I agree could be long term safe investment at the new fixed rate. I have two problems with it and one is low maximum purchase even if you gift some and my second problem is they don’t allow for more than one person payable upon death. As far as I know, you can’t have multiple beneficiaries.
I considered solving the beneficiary problem by designating different beneficiaries for various bonds. If I buy two 5K bonds per year, 2 beneficiaries is easy. The math won’t work out exactly for some situations, of course. The maximum purchase remains a problem unless you want to resort to the slightly complex system of business entities and trusts that some creative commenters here have described.
Thank you for pointing out the longer term benefits of investing in I-Bonds. Of course, their main disadvantage is the low annual maximum. Though there will be some who can use trusts and/or sole proprietorship accounts to invest larger amounts.
In appropriate situations, and because TIPS have virtually no maximum investment limits, it seems that TIPS would be a better choice for the longer terms, as long as the real yield remains significantly higher than the current I Bond rate (at close last Friday the Bloomberg site quoted a real yield of 1.81% versus the current I-Bond fixed yield (equivalent to real yield) of 1.30%). The appropriate situations would seem to involve TIPS held in IRA accounts, which defer not only the taxes on the semi-annual income payments but also, as you have so ably noted in your publications, the cumbersome record-keeping otherwise required for tax purposes to annually track and report the “phantom” taxable income (OID) generated by the annual inflation increments. Better yet, it seems that if held in a Roth IRA account, TIPS permanently avoid those issues. Does that comparison make sense? For this year, I am looking at the feasibility of converting some of my traditional IRA funds to a Roth account for holding fixed income assets. My tax bracket (for this year only) is likely to be relatively low, so this would be an opportunistic year to do the conversion.
Thank you.
Lou, be aware that you can transfer/convert individual securities (need not be cash).
Last year, I converted fixed incomes that had paper losses due to the high rise in interest rates. That way I got some preferential tax treatment — the mark-to-market value was below the face value so, in essence, I transferred an amount greater than what was actually transferred. I even did it to some that were very close to their maturity and the final interest payout transferred as well. A little tax-free, risk-free boost.
Nice you mentioned this useful tip.
Same with I Bond redemptions pertaining to the 0% fixed rate. I feel best to use GIFT box purchases and redeem the I bonds in the year when income is lowest so taxes on interest earned will be at the lower tax rate. Many 0% fixed rate bonds have been held long enough and have earned interest that is significant enough, one can atleast time the redemptions to minimize taxes unless one has a college age child in which case, if income is within 167k for joint filers, taxes on I-bond interest is waived if proceeds used to pay for college tuition and the like!
I don’t currently own TIPS, but have owned them in the past.
Because of those “phantom earnings” and other tax headaches pertaining to TIPS held in a taxable situation, and because I’m a person who prefers to keep my tax life as simple as possible (and the amount of time I spend computing periodic estimated taxes, and completing year-end tax returns, as brief as possible), I consider an IRA or similar tax-favored account to be the only palatable place to hold TIPS. And I think the absolute best possible place to hold them is in a Roth IRA, where there’s no issue of involuntary RMDs that could potentially disrupt (i.e., force sales of) a carefully constructed ladder of TIPS originally intended to be held until maturity.
I have an I bond ladder since 2019. I am planning on selling 10K to get a new 10K in April at the 1.3% fixed rate. I have one from 4/1/2019 which (I think) will mature on 3/31/2024 (or is it 4/30/2024?) but it has a fixed rate of 0.5. The other option is to sell one from 11/1/2020 which has 0.0% fixed rate but I will have to pay a penalty of 3 months interest. What would you advise?
Just my opinion: I would not be redeeming an I Bond with a 0.5% fixed rate when I have an alternative at 0.0%.
This financial advisor states: “I’ve never thought I bonds were a good place to park cash.” The last time I bonds had a fixed rate of 1.3% was back in May 2007. Putting your cash into I bonds in May of 2007 would have given you an annual rate of 3.92% over the past 16+ years according to eyebonds.info. I don’t know of any savings accounts/CD’s that could’ve generated that type of return.
On May 1, 2007, you could buy a 20-year Treasury yielding 4.89% nominal, which was a great investment. Most people are hesitant to even consider a 20-year Treasury.
I still remember, with figurative tears in my eyes, the early 1980s, when my wife and I were getting our first good post-college jobs, and we wanted very badly to get out of an apartment and own a house, and so we paid “points” to a savings and loan (anyone remember those?) to be “allowed” to have a mortgage at “only” 13.5% interest. (Of course, we later refinanced, more than once, as rates fell.)
If we were only thinking about money, we would have taken the house money and bought 30-year Treasury bonds at those kinds of rates. But we were thinking more about how we wanted to live than about what would be profitable–and, hard to believe now, in the economic climate of that time, there was actually widespread fear that interest rates would go even higher, meaning that, even at such rates, 30-year Treasurys, if needing to be sold before maturity, would prove to have been a risky bet in the midst of still-falling bond market prices.
It seems absolutely surreal to recall that time now. I hope it never returns. On the other hand, it would probably be heaven for the fixed rate portion of I Bonds. 🙂
Having shelter is pretty fundamental so I don’t think you should second guess your decision.
I am thinking that Treasuries are callable by the Govt. and it may have called some of the high interest bonds from that time.
I don’t know of any traditional Treasurys that are callable.
Thanks for the clarification. I was probably thinking of voluntary buy backs.
What happened just 2-3 months ago was also somewhat a repeat of attractive coupon rates for long bonds albeit to a lesser extent in comparison to the 80’s………long bond interest rates kept going up up up and so much speculation that it will keep on going that way………..but then a sudden U-turn.
Many will regret that they missed the boat 2-3 months ago. But 20 to 30 year bonds or even 10 for that matter, the losses will be steep if interest rates keep going higher after you bought it……….even if paper losses, it will be difficult to stomach for too long. And especially, if one faces an unforeseen need for that money in which case paper losses will become real losses.
For this reason, long bonds can be considered speculative investments and people mindfully allocate just a small piece of the investment pie to long bonds.
5 year bonds are a good place to be for the most part. Possibility to redeem just in case it becomes necessary without incurring much loss. Somewhat same category as I-Bonds too but with a higher REAL yield and I-bonds have no risk of any losses other than a 3 month interest loss if redeemed prior to 5 year time.
TIPS are not exactly the same as other Treasurys, because their return (currently) is a positive coupon rate above inflation. You know you will get 1.93% above inflation on a 20-year TIPS today. That guarantees you a real, inflation-protected return over 20 years. But to make that work you need to hold to maturity. If you aren’t sure you can hold to maturity, you subject yourself to risk.
Thanks for the much needed reminder of REAL inflation adjusted value of TIPS vs. treasuries. It is for this reason I loaded up on 5 year TIPS in my retirement accounts in October, perfect timing it was!
Time for me to attend to non-retirement accounts.
Now I can see why you do laddering across maturities, short to long. So you will always have something near maturity to tap into when it is needed minimizing risk and loss incurred in selling before maturity.
Time for me to consider laddering too. Thanks!
Bought 6 each in my wife’s and my accounts as gifts (2 x 6 x $10,000) because of the fixed rate. Using same strategy my Dad did for us when he bought $200,000 at one time in his gift box just before he knew he was going to die. We received all $200,000 because there is no limit on the amount you can receive per year on TOD.
Hi Elvis,
I can understand 2 x 2 x $10000 (i.e. you gift to wife and she gifts to you) How do you get 2 x 6?
Probably not totally clear. Two accounts, each account bought 6 gifts of $10,000 each. Thus, $60k in gifts in each account for a total of $120k. Hope that helps.
Due to 10k limit in giftbox purchase per transaction, he did 6 transactions worth 10k each in his account for delivering to wife as gift in future years.
His wife did same thing.
A total purchase of 60k worth to be gifted in future years at 10k per year.
And he also adds a valuable insight on how things work at death – Transfer on death has no cap on dollar amount of holdings in GIFTBOX!!!!! Nice to know that!
For short term investments up to 5 to 10 years, I believe as of the last time I checked, TIPS offer a higher REAL YIELD or fixed rate than I bonds.
I bonds I feel is more suited for longer durations for a better inflation adjusted return and you feel you may have a need to tap into the funds in case of emergencies. I bonds principal doesnt fluctuate with interest rates like TIPS does – so you can withdraw without incurring principal loss and may not incur interest loss after holding for 5 years.
Can you explain the specific tactics to build a TIPS ladder from scratch starting now? Thank You so much!
You can use a tool like tipsladder.com to find the amount to buy for each year. You’d select the beginning and ending years, and realize there are no TIPS maturing in 2034 to 2039, although a 2034 TIPS will be issued this month. You would need a brokerage account and you would be buying the individual TIPS on the secondary market. Here are helpful links: https://www.tipsladder.com/static/TipsLadderResources.html
Just an addendum to David’s true-as-far-as-it-goes statement that the limit on electronic I Bonds is $10,000 per person.
Example: Spouse #1 TreasuryDirect individual account is allowed $10,000. Spouse #1 TreasuryDirect individual trust account (even if both of Spouse #1’s TreasuryDirect accounts use the same Social Security number for tax reporting purposes, the trust is an “entity account” with its own purchase limit separate from that of the non-trust individual account): an additional $10,000. Spouse #2 TreasuryDirect individual account and individual trust account: another $10,000 per account. Spouse couple also has a trust account in the name of their joint trust: another $10,000. Federal tax refund received as I Bonds instead of cash: up to $5,000 per return (not per person), or the actual refund due, whichever is smaller.
So, for a married couple who availed themselves of these kinds of account arrangements, that’s potential I Bond purchases of $55,000 per year, without resorting to any gift box complications.
I agree with David, I Bonds are an attractive part of your retirement, but they are not the “end all be all”. Don’t think they are worth that much investment. I have 55,000 I bonds in total and that is a good enough slice of retirement. There are better alternatives and options out there. Just offering some perspective. Everything in moderation.
I’m uncertain of the wisdom of you and me quoting David, since everything he’s ever written on this website makes clear that he’s superbly capable of speaking eloquently for himself.
But, since you’ve represented *your* view of *his* view, I’ll likewise note that he has also regularly referred to I Bonds as inflation-adjusted future cash; has emphasized that they’re not directly subject to the price and rate swings affecting marketable bonds (in particular, they never lose whatever inflation-adjusted value they’ve already accrued); and, if a person seeks a long-term holding, has suggested not cashing them until actually in need of the cash.
If your own portfolio of I Bonds comes to $55,000 total, and you expect that $55,000 in guaranteed inflation-adjusted cash is the most you’re ever likely to need over the course of your retirement, then I wish you well and hope your assumptions are correct.
For myself, since I Bond earnings continue to accrue for 30 years until maturity, that time will more than cover my remaining statistical life expectancy. I own many other things, but I Bonds (and TIPS, if I wished to own them) are the only things I own that are explictly and contractually linked to an official measure of “inflation.” Nominal bond returns s aren’t. Stocks and stock-holding mutual funds returns aren’t. My house isn’t. My retirement annuity isn’t.
Therefore my goal for this kind of inflation-adjusted/value-never-goes-down investment vehicle is to accumulate it. If things turn out that I never need it, I’ll consider myself to have been fortunate. But the I Bond holdings will still have served their protective purpose. I think of it as something like buying an insurance policy for a house that, over a period of 30 years, “failed” to burn down–with the distinction that the I Bonds, unlike the insurance policy, don’t raise annual premiums and actually earn money along the way.
Well said my friend. 55k of IBonds is equivalent to the “A drop in the bucket”.
I am happy to have much more than that. Ibonds are my bond allocation in my portfolio. Wrong or right that’s what I’m doing.
The Bogleheads forum has a current thread in which a person asks what financial (or job, or family, or health) circumstances led other readers to decide it was the “right” time to retire.
The prolific and literate poster “valuethinker,” Canadian-born but long resident in Britain and employed in the financial industry (i.e., approaching but not yet actually retired), listed various factors that play a role. Among them: “A sense that you can meet financial goals & lifestyle. This is why it is risky to rely on recent short-term stock market performance. It’s ‘bankable’ if it is in TIPS or ibonds, and not much else.”
That pretty much describes my own reasons for accumulating these inflation-linked securities.
Here’s the Bogleheads thread itself, if anyone else wants to read. It just started last night and is still quickly accumulating new posts.
https://www.bogleheads.org/forum/viewtopic.php?f=11&t=420965
Unless 55k is all you have.
I tend to think of security types in terms of percentage of retirement funds invested. What percentage should be in I Bonds. 25%?
In our household, about 15% of all assets is invested in inflation protection. That was my goal for a long time, but it was hard to achieve when real yields were negative or very low. If you ask, “only 15%?” I’d point out that these are all in my holdings and my wife has other investments, creating a nice mix of low-cost index funds and individual Treasury holdings.
Maybe Justin below made my point better than I. Read his whole message, especially the last paragraph. I like I bonds and have purchased since 2002 and will continue to, but I also am on the same page as Justin.
To TipswatchChat and Chris B: Both of you expressed perfectly legitimate opinions, based on your investment philosophies and needs. I love the intelligent discussions that we find here.
TipswatchChat, on the subject of the “retirement decision.” My decision was set 7 years ago when my long-time newspaper employer laid me off. Was I prepared for that moment? Yes, I was. Greatest day of my life.
As I’ve been known to say, Not working beats the hell out of working. Every day and it is not even close
Thanks for this article, David. I also plan to watch real yields and buy my full allocation in April if current trends continue. My debate is whether it’s worth using part of my tax refund to buy additional paper I Bonds at the 1.3% fixed rate. I’m currently leaning no.
Even though I Bonds are a long-term investment, I do still compare their short-term return with other investment options. If inflation doesn’t rebound early this year, the next variable rate could conceivably drop to 1.4%, creating a composite rate of 2.7-2.8%. This would mean I Bonds purchased before April 30 may return only about 4% after a year (not including the 3-month interest penalty). Meanwhile, shorter-term investments like T-bills and bank CDs may still see returns averaging 4.5-5% this year, especially if the Fed cuts rates at a slower pace than expected.
I do think I Bonds are an attractive long-term investment at the current fixed rate – but maybe not attractive enough to justify buying more than the $10k maximum.
Yes, if you think inflation may drop that much & plan to sell the iBonds in a year or so, I think tbills or CDs make more sense.
I’ve thought about the $5k paper bonds as well, but it’s the paper part I don’t like. What could the reason for that limitation be? Did they figure ppl will be less likely to redeem a paper bond?
I am in the minority, but I am actually fine with the $10,000 a year limit (OK, except for this year at 1.3% fixed). I have a large allocation in TIPS and I Bonds and adding $20,000 a year for a couple works well for me.
Thanks David. I’m in complete agreement with your recent analysis on I Bond buying strategy. In the fall I redeemed all of our 0% percent fixed rate bonds and bought the maximum for ’23 in Dec. I plan on buying the maximum again in ’24 and came to the same conclusions that you did about waiting. In fact, I think it always makes sense to wait until that last CPI reading before Nov or May. Why jump the gun before you’re dealt all the cards? The only 0% FR Ibonds that we had left were some paper bonds that proved very difficult to redeem. I always thought you could take them to any bank and cash them in but this is no longer the case. Most banks won’t cash them at all and the few that do have strict limitations on redemptions. I wound up mailing my bonds to TD and it cost $32 including insurance. Further downside: I have no idea when my bonds will actually be redeemed. A person at TD said 4-6 weeks for processing. In any event, I’m thinking about gift-boxing this 1.3% issue (which I’ve never done before) as I now think after Powell’s last presser that it may prove to be at least a near to mid-term high. Despite my grief with paper bonds, I’m also thinking about using our tax refund to get more at the 1.3% FR. But I’m wondering: if we file our returns on time or by a specific date, will we be guaranteed to get an April-issued (1.3% FR) paper bond? Or is it possible Treasury will issue a May bond with an unknown rate? Thanks for all of your help.
I also have some paper I Bonds (with high fixed rates so I am keeping them) but I think we will need to deliver those to TreasuryDirect soon to get that transition over with. We cashed EE Bonds last year with no problem, but I have been hearing of more and more situations where banks won’t cash them.
Key bank cashes them for customers. Also, I was surprised to learn that a local credit union also cashes them.
Converting some paper bonds this year is on my list too.
Your articles always talk about holding I-bonds to maturity, 30 years.
What about redemption in 10 to 20 years? How does that stack up overall?
I am at the age where I would probably not hold to full maturity, so just wondering how to fit my I-bonds into my overall picture. Thanks!
Actually, I don’t believe most people will hold I Bonds for 30 years. The way they work best is to hold for 5 years, and then you have a cash-equivalent savings account that will grow with inflation, tax deferred, with no penalty for withdrawal. At that point — possibly in retirement — you can use those I Bonds for needed spending money, recognizing that federal taxes will be due on the interest.
My wife and I will buy 20K of Ibonds in April at 1.3 fixed. If we put another 10K each in gift boxes will we get that same 1.3 rate when we buy in, probably in 2025 thanks
“If we put another 10K each in gift boxes will we get that same 1.3 rate when we buy in, probably in 2025 thanks”
The fixed rate of an I-Bond is set at the time of purchase, whether it is sent to the gift box or not. If an I-Bond is purchased in April 2024 into your gift box, it will have that 1.3% fixed rate component until its maturity. That holds true when you actually deliver it to the recipient from your gift box too, whenever that may be. I am guessing that it is the delivery of the gift box I-Bonds that you are referring to occurring in 2025 rather than another purchase. If you were to purchase an I-Bond in 2025 or even anytime after April 2024, it will carry whatever that latest fixed rate is at the time of that purchase. I-Bonds already held will not be affected by later fixed rate changes.
Thanks very helpful
Thanks again for another informative article. With your guidance, I built a modest TIPS Ladder last fall in my tIRA. I’m thinking of doing a targeted Roth Conversion for a some of the highest yield TIPS (paying taxes separately). Roth is mostly in equity index funds so this would provide some tax-free guaranteed inflation protection, as I plan to hold to maturity. I’m retired so not able to buy TIPS directly in my Roth. Any thoughts on this? Thanks!
Not a bad idea, although conventional wisdom says keep Roth account in stocks, since it will be the last money spent. I have considered doing the same thing, and might do a small conversion this year of one TIPS to the Roth.
David, I have a slightly different take. I like fixed income (like TIPS) in my Roth. As opposed to a taxable account, you will pay no income tax on the earnings. With CDs or individual TIPS, you have guaranteed low risk income AND you actually have a higher tax equivalent rate.
I take the rate (or fixed rate for TIPS) and gross it up to the tax equivalent yield.
For example, at a federal marginal tax rate of 22% a 2% fixed TIPS rate would be the equivalent of 2.564%
= 2%/(1-Tax Rate/100) = 2/(1-.22)
A 5% CD would be equivalent to 6.1%
If you have a state income tax, use the combined Fed and State marginal tax rates.
And, the higher your marginal tax rate, the higher the tax equivalent yield (one benefit of higher marginal tax rates).
While it is a matter of perspective, as one gets older and wants less risk from stocks, it is an approach.
Excellent points, thanks.
I like this idea, a lot, as well as holding stocks for their growth potential. In short, have both kind of assets.
“I’m retired so not able to buy TIPS directly in my Roth.”
Are you certain you are unable to do that? I am retired and have a Roth with Vanguard and I’ve bought TIPS in it with no problems.
Appreciate all the feedback! Just to clarify, because I’m retired, I can’t contribute to a Roth Ira.
I could buy new TIPS in my existing Roth but the yield would be lower than the TIPS I bought last Sept/Oct in my IRA. I’d rather have the highest yield TIPS in the Roth so only way to get that would be with a Roth conversion.
Is your “Roth IRA” a free-standing Roth not integrated into your employer’s 401K etc.?
If it is, I can’t see anything on the IRA website forbidding your from contributing to your Roth after retirement. Indeed it says you can contribute as long as you live.
https://www.irs.gov/publications/p590a#en_US_2022_publink1000230975
As she noted, she can’t contribute new money because she is not currently employed and has no “wage income,” which is required for a new Roth contribution. But she can move money within tax-deferred accounts.
You need “wages” or similar taxable compensation to contribute to a Roth IRA. Spouse income counts. Original poster probably doesn’t have this.
I’m collecting retirement each month, but that gets taxed as income. If one lives on taxable retirement income, does that mean one can’t contribute to an IRA because those retirement checks aren’t “wages?”
Correct. It must be wage income. If it is subject to social security and medicare taxes, it probably is considered wages.
I’m looking to buy some MYGA CD type annuity about 6% yield and tax free. Why mess with these and TD.
If you like the terms of the MYGA and can handle the early withdrawal fee, seems fine. When you say tax free, how is that accomplished after you start taking withdrawals?
The MYGA products are just like CDs and you pick how many years, like CDs can have early out fees or pay back interest like Ibonds. You have the option not to take the money and can continue to roll tax deferred just like Ibonds. Here is a recent example https://www.annuityadvantage.com/multi-year-guarantee-annuities/personal-choice-annuity-3/. These are state insured to 250k.
Which state? I’m not sure all states insure them. I want to look into these further, but I think the higher rate is due to higher risk
David, Thanks for the succinct analysis! I just sold my 0% fixed rate I bonds, planning to replace at end of April if conditions appear right, and may put a couple in gift box as well.
Thank you for so many years of sharing your knowledge and predictions with us! I’ve based a lot of my I Bond purchasing decisions on your guidance. I think, however, that you do your readers a disservice by never mentioning that one can purchase $10k of I Bonds/year in separate entity accounts such as sole proprietorship and trusts. I’ve been able to purchase much more than $10k/year beyond my individual account, and I would have never known I could do this from your articles, but I learned about it on Bogleheads. Please consider editing your article to include that valuable information. It can make a huge difference to a small business owner like myself and/or a person with a trust(s). Thank you and happy new year!
Thanks for this feedback, Reader. Now you have presented the information for other readers to see. It’s true that I do not often mention trusts or entity accounts because I have no expertise in those areas. I know people use them, but I can’t give advice on them since I have no expertise.
David, I do so enjoy these Sundays when you post new content!
I have been a buyer of I Bonds since the early days.
Since the financial crisis of 2008, I have resented that we now need to consider (more so than ever in my lifetime) the possibility of deflation. I Bonds give me the comfort of knowing my investment is safe, a form of inflation AND deflation insurance, and has allowed me to sleep at night.
On the other side, one also needs to (unfortunately) consider the state of the US economy and its international standing. This country can easily squander its superior credit rating; yet another thing I resent, as it could diminish the certainty of US treasuries.
My one “consolation” is if the US were to renege on its debts, just about every other common investment will be severely damaged along with it; that is, we’ve we’ll have bigger problems on our hands.
Thanks again for all your guidance and tutelage.
Re deflation and TIPS-
I have a TIPS ladder, bought on secondary market and therefore with deflation exposure.
I take some comfort knowing that in an extreme deflationary environment I may receive less than purchase price at maturity, the stuff I buy will have a lower price so, as in an inflationary environment, my purchasing power is preserved.
Am I delusional in this belief? (Query for our host or any others with knowledge and perspective).
Agree- I savings bonds & TIPS in a ladder are amazing LT security for me (retired CPA). Bought my ’24 I savings bonds last week, wanting that 5.27% yield Jan, Feb, Mar…Thank you for your blog – it is excellent!
I agree with you and I’m buying mine now as well.
Agree on both counts. Tipswatch is a unique source of info thanks to David’s hard work.
My alternative plan is to get the ~5.3% money market yield on my cash until late April, then buy I-bonds at that time and lock in the 5.27% rate for another 6 months. Doing that will allow me to enjoy current interest rates for 10 months, which will be beneficial if short-term rates do start coming down during that period. If short-term interest rates go down significantly in the next 2-3 months I can always just buy the Bonds then.
On the use of trusts, like many people we have a revocable living trust in order to bypass probate when we die. That trust bought an I-bond before (0%, redeemed on January 2) and will do so again in April.
True! But I am lazy…1 purchase & done for 30 years 🤣
I’m planning on buying tbills maturing around April 15. I wonder, though, if thousands of ppl redeem their 0% fixed-rate iBonds & buy that tbill, could it depress the yield for that tbill? I’m guessing not, since we’re buying non-competitive, but I don’t know.
The T-bill market is massive and wouldn’t be affected by I Bond redemptions.