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Is it time to say goodbye to I bonds?

Should you sell your I-bonds?

Back in April of 2022 we sent out an article encouraging everyone to consider buying US Treasury Series I Bonds. Back then, (because inflation, as measured by CPI, was much higher than today) I Bonds offered an annual interest rate of 9.6%!  This idea/advice was a home run. But as you probably have already seen, rates have dropped substantially since then. What does this mean for your bonds? Should you cash out and look for other places to park your money? What's the optimal time to sell?  Below are 6 key factors to think about when considering an I Bond sale.

Factor 1: The Falling Inflation RateThe latest announced I Bond semi-annual inflation rate was 1.97%, falling considerably from 3.24% in November 2022 and 4.81% in May 2022. These numbers are determined from CPI-U, so the news isn't all bad if you're worried about inflation. What it does mean for sure is that I Bonds previously yielding above 9% APY a year ago are now considerably below that. The specifics of the falling rate depend on when you bought your bond(s).

Factor 2: AlternativesBefore you sell, make sure you have a plan for what you're going to do with the cash. Common options are High Yield Savings Accounts, Money Market accounts, CDs, Corporate Bonds, etc. Please give us a call to discuss your options because we may have some options that you are not aware of.

Factor 3: Early Sale Prohibitions and PenaltiesThis is a big one that confuses people (including us!). There are two major restrictions on the sale of an I Bond.

  1. They can't be sold within 1 year of purchase.

  2. If you sell within the first 5 years you have to forfeit the most recent 3 months of interest. (e.g. if you sold in February 2024, you'd lose interest from December, January, and February.)

This affects the optimal month to sell your bond. Let's say the bond drops in rate below alternatives. If the bond is still less than five years old, (most are) you might want to wait three months after the rate drop. You want the trailing three-month penalty to be calculated from months with the lower interest rate.

Factor 4: Timing Once you figure out which month you want to sell, it's generally advised to sell at the beginning of the month. This is because you'll get the same amount of interest as if you sold at the end of the month, but you'll get your money sooner. If you sell at the end of the month, you'll potentially miss out on a full month of interest you could be earning somewhere else.

Factor 5: Partial Sale For the fence sitters - Need some cash but want to keep earning interest on the rest? Good news, you can do a partial redemption of your I Bond.  How much can you cash at one time? Any amount of $25 or more to the penny.

Factor 6: Taxes When you sell your I Bonds, the interest you’ve earned is taxable at the federal level. However, I Bond interest isn't subject to state or local income taxes.  While the IRS allows you to pay incremental interest each year, most folks defer federal taxes on the interest until they sell (or until the bond matures). You will get a Form 1099-INT, available early the following year. 

Bottom Line:  It is time to at least consider alternatives to those I Bonds we recommended back in 2022. Give us a call with the exact date of your purchase and we can tell you your current rate. And if that rate is too low, we can tell you when you should consider selling to give up the least amount of interest.

As always, thank you for the opportunity to serve you and your family.


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