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I bond interest rates are on the rise again. Are they a smart place to park your cash? Read on to find out.
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Series I savings bonds, better known as I bonds, are a special type of savings bond issued by the United States Treasury. They’re designed to provide risk-free income that is protected from the effects of inflation over time.
I bond interest rates have been rather high over the past couple of years — as high as 9.62% — as inflation has persisted, but has cooled off to a relatively low 4.3% from May through October of 2023. However, the Treasury Department just announced the new I bond interest rate, and the good news is that savers are getting a raise.
The new I bond interest rate
I won’t keep you waiting. The new I bond interest rate is 5.27%.
This is an increase from the previous rate of 4.30% and will apply to all I bonds purchased from November 2023 through April 2024. And to be clear, this rate will apply for six months, regardless of when exactly during this window an I bond is purchased.
An I bond’s interest rate has two components — a fixed portion and a variable portion. For new I bonds, the fixed rate is 1.30%, and this will stay the same for the life of the bond. This is mainly based on the current interest rate environment — for example, the fixed-rate component was 0% from May 2020 through October 2022, while we were in a low-rate environment.
The variable rate for new I bonds is 3.94%, and this is the component that changes with inflation over time. (Note: The overall rate is annualized, which is why 5.27% is a little higher than the two main rate components combined.)
The key point to know is that if you buy I bonds now to take advantage of the 5.27% yield, you’ll need to realize that the “headline” interest rates published in the future may differ somewhat from what your bond is paying. It’s important to know your fixed rate, so you can combine it with whatever inflation adjustment applies at the time. Fortunately, the Treasury Department maintains an excellent chart that shows the current yield of I bonds for various issue dates.
Benefits and drawbacks of buying I bonds
The benefits of buying I bonds are clear. You’ll get a guaranteed yield for the first six months, and your money will be protected from inflation over time. If inflation spikes to double digits (which has happened before), your future I bond yield will reflect that.
There are some drawbacks, however. For one thing, you can only buy $10,000 of I bonds each year through Treasury Direct. You can invest as much as $5,000 in addition to this by using your tax refund to buy I bonds, but at most, you’ll be able to put $15,000 into I bonds per year.
Additionally, your money is locked up for a while. You cannot cash out of I bonds at any time within the first year, no matter what. And if you cash out within the first five years, you’ll face a penalty that equals the last three months’ worth of interest.
Is it a good place to invest now?
To be sure, I bonds aren’t designed to be an all-in-one investment strategy. It’s still important to invest through your employer’s 401(k) or similar plan, or to open a brokerage account to invest in stocks, ETFs, mutual funds, and other instruments to build up a nest egg. However, I bonds can be a great tool to set aside some of your cash in a risk-free way, and to hedge against the impact of inflationary pressures on your spending power.
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