Revisiting I-Bonds

Many investors took advantage of the recent high inflation rates to purchase I-Bonds from the Federal Government. Now that inflation rates have decreased significantly, many bondholders are wondering what to do with their investments.

What Are I Bonds?

An I Bond is a U.S. government savings bond tied to inflation. It is a 30-year bond whose interest rate resets every six months based on current inflation data. Most bonds have a set interest rate they pay for life. An I Bond is unusual as its rate resets twice yearly to keep up with inflation. In times of high or increasing inflation, the yields I Bonds can provide are very attractive. However, as inflation recedes, so do the yields.

Good Times No More?

I Bonds gained popularity in 2021 and 2022 as inflation soared. The November 2021 I Bond interest rate was 7.12%, followed by the May 2022 rate of 9.62%. For investors, getting a yield of high single digits from the U.S. government was too good to pass up. However, as the Fed aggressively targeted inflation, the interest rate paid on I-Bonds has declined. The last rate, set in May 2023, was 4.30%. Since I Bonds are 30-year bonds, investors may be wondering what to do now.

New Rate Change Coming November 1st.

On November 1st, 2023, the government will set the new six-month rate for I-Bonds. Even though inflation hasn’t changed much since May, there is a good chance the new rate will be higher than the current rate of 4.3%. The rate may be higher because yields on long-term government bonds have increased substantially since May.

While I-Bonds are driven by inflation, there is a component of the bond whose rate comes from long-term government bond yields.

What Are Your Options?

You are allowed to sell I-Bonds before they mature. There are a few rules to know. First, you cannot sell if you haven’t owned the bond for at least twelve months. After that, if you’ve owned the bond for less than five years and sell it, you will give back the last three months of interest you earned.

For example, if you sell the bond after owning it for eighteen months, you’ll only earn fifteen months of interest. If you’ve owned the bond for over five years, there are no penalties for selling it. Taxes owed on the interest of I-Bonds are deferred until you sell, or the bond matures. You will get a 1099-INT to file with your tax return if you sell.

Summary

Now that I-Bond yields are no longer offering the eye-watering yields of 2022, you may be looking to sell. Consider waiting until the November rates are revealed to see if the rates climb back a little higher and make the bonds more attractive versus other options.

Also, understanding the tax impact of selling the bonds is important as we approach year-end. If this is a year you would prefer to avoid additional taxable income, then selling the bonds in January 2024 or later can push the taxes owed off for another tax year.

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