I Bonds vs. Savings Account: Which Is Better?

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I bonds and savings accounts both have attractive yields, but they are very different places to put money. Here’s what to consider when choosing one. 

The Federal Reserve has rapidly raised benchmark interest rates recently, and this has caused the interest rates paid by high-yield savings accounts to rise to levels not seen in quite some time. In addition, the reason for the Fed’s rate hikes — inflation — has remained at elevated levels, and that has made inflation-protected savings bonds (I bonds) far more attractive.

Both savings accounts and I bonds are essentially risk-free places to put your money, and both are paying elevated yields right now. But which is the better choice for your money? Here’s a look at the pros and cons of each to help you decide.

Reasons I bonds could be a better choice

Series I Savings Bonds, or I bonds, are specifically designed to protect your money from the effects of inflation. Savings accounts are not — they simply pay interest based on prevailing rates.

And these rates can be very different. For example, in mid-2022, I bonds paid 9.63% interest because that’s what the inflation rate was. But at that time, most high-yield savings accounts were paying one-third of that interest rate, as benchmark interest rates hadn’t quite caught up yet. To be clear, for much of recent history, savings accounts have not kept up with inflation. It wasn’t too long ago where it was difficult to find a yield greater than 1.5% or so from a high-yield savings account. But now you can expect to find banks offering savings accounts with 4% APY or higher.

On a similar note, I bond interest rates are less likely to disappear entirely. New I bonds issued as of this writing have a 0.9% fixed rate component plus the inflation adjustment. The Fed’s target inflation rate is 2% over the long run, so even if the central bank is successful at controlling inflation, I bonds could still have a substantial yield.

Reasons a high-yield savings account could be better

The biggest arguments in favor of savings accounts mainly have to do with the drawbacks of buying I bonds.

For one thing, I bonds cannot be redeemed at all for the first year, and there’s a penalty for redeeming them within five years. They are designed as long-term inflation protection vehicles. On the other hand, money can be withdrawn from a savings account whenever you want.

In addition, there’s a limit to how much you can put in I bonds. Currently, you can buy as much as $10,000 worth of I bonds every year. So, if you have, say, $50,000 in savings, you literally can’t choose I bonds for all of it.

Finally, you may be able to get a better yield from savings accounts. The current I bond interest rate is 4.3% for those sold through the end of October, and this rate is guaranteed for the first six months. Meanwhile, some of the high-yield savings accounts we follow currently have APYs of 4.5% or more.

Which is best for you?

Like with most financial products, there’s no one-size-fits-all answer to which is the better choice. It depends on your personal goals and how long you’re willing to commit to leaving your money alone.

Finally, it’s also important to keep in mind that it isn’t necessarily a choice between the two of them. There’s nothing wrong with maintaining a high-yield savings account with money you might need for unexpected expenses, especially while rates are high, and putting some money you’re certain you won’t need for at least a few years into I bonds to protect yourself from inflation.

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