I Bonds Pay 5.51%: What You Need to Know Before You Buy

Now that Series I bonds have higher interest rates, the government-backed, nearly risk-free asset may become more attractive to some investors. However, I-bonds have drawbacks and there are alternatives to consider.

Newly purchased I bonds currently pay an annual interest rate of 5.51% through April 30th. This is up from the 4.26% yield if purchased through October.

Amid rising inflation, the interest rate on the floating portion of I bonds rose to 4.08%, while the fixed portion rose to 1.40%, the highest since 2006. The combined interest rate of 5.51% is the highest yield since November 2022.

The new I-bond rates are “very attractive,” said Ken Tumin, founder of DepositQuest.com, a blog that tracks I-bond rates among savings accounts.

I The variable portion of the bond’s interest rate is reset every six months based on the Consumer Price Index. For the next six months after purchase, I-bonds look “very competitive” compared to other short-term cash options such as savings accounts and certificates of deposit, Tumin said.

On the other hand, the I-bond’s fixed 1.4% interest rate remains the same for as long as you hold it, which could make it attractive to long-term investors, he said.

But the bond with me is not right for everyone. Here are some important things to know before you buy.

Investors can purchase $10,000 of electronic I bonds per person per calendar year through their TreasuryDirect account. You can also open additional TreasuryDirect accounts for other family members or businesses to make further purchases.

I Interest on bonds is tax deferred until maturity and is not subject to state or local taxes. You can also avoid federal taxes by using the funds for qualified education expenses.

But experts say there are some drawbacks. Your funds will be locked for 12 months from purchase and you will lose interest on the last 3 months if redeemed within 5 years.

Advisors typically recommend keeping at least three to six months’ worth of living expenses in cash for emergency savings. Experts say I bonds could increase those reserves, as long as they have enough readily available cash stored elsewhere.

“I always say (I bonds) are a secondary emergency fund,” said David Enna, founder of Tipswatch.com, a website that tracks interest rates on Treasury Inflation-Protected Securities (TIPS) and I bonds.

I If you hold the bond for five years, you can redeem the money if you want without penalty.

I Due to corporate bond purchase limits and restrictions, as well as complaints from Treasury Direct, advisors often recommend other options to clients who wish to preserve their purchasing power.

“For most of my clients, I-bonds are more trouble than they’re worth,” says Eileen Olson, a certified financial planner and founder of Emerald Wealth, an advisory firm in Daufuskie Island, South Carolina. “The amount is too small to be a problem.”

For a $2 million portfolio, the annual purchase limit of $10,000 is only 0.5%, resulting in an annual return of about $550 before federal taxes. “That won’t protect anyone’s lifestyle from inflation.”

Instead, Olson prefers TIPS, which have no purchase restrictions and can be purchased with other assets outside of Treasury Direct.

TIPS include Five-, 10- and 30 years As of November 2, 30-year yields ranged from about 2.3% to over 3%.

However, the right choice depends on your investment goals and timeline, experts say.

“For short-term cash, it’s easier to find Treasury bills or high-yield savings,” Olson said.

Similarly, Treasury bills (T-bills), which are backed by the U.S. government, have terms ranging from four weeks up to 52 weeks. As of November 2, yields on some Treasury bills were well above 4%.

By comparison, the top 1% of high-yield savings accounts paid an average of more than 4%, according to interest rate comparison site DepositAccounts. According to Bankrate, some one-year certificates of deposit were also offering interest rates of more than 4% on the same day.

Money market funds are another option. Some of the largest funds were paying about 4% as of Nov. 2, according to Crane Data.