One year ago there was a craze about I-Bonds. Many people inquired about them, and many people bought them. Perhaps you were one?
I wrote about I Bonds in May 2022, and wanted to do an update on them now that we are in May 2023.
What’s Changed?
Well, the inflation rate over the past few years has been around the 7-to-9% range. Pretty solid for a relatively riskless investment.
The new inflation rate on I-Bonds for May-to-October 2023 is 3.38%. This is drastically lower than where it’s been than past years.
Thus, advisors like myself are getting the question: “Should I cash out”?
Keep reading if you are trying to determine whether to sell or hold (or add to) your I-bond holdings.
Note: Much of the numerical data below was taken from other trusted sites (including tipswatch.com), I did not attempt to re-create the figures. But if you are basing your decisions on what to do with your I-bonds, please double-check the math. Everyone’s situation is different and unique, but take the advice below with a grain of salt. And seek further clarification from your trusted financial partners.
Important to know When Cashing Out I-Bonds
The two most important things to know when cashing in I Bonds are:
- Your personal interest rate on the I Bond resets on your I Bond’s individual 6-month reset time frame.
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- NOT when new rates are announced in May and November
- For example, if you bought an I Bond in January your bond resets its rate in July and January every year.
- You might hear the new rate in May, but that rate won’t be effective for your bond until 2 months later in July
- 2. You lose the ‘last 3 months of interest’ when you cash out that I Bond in the first 5 years
These two facts added together mean:
- When you hear the new interest rate and you’re not happy with it, chances are that new, lower rate isn’t effective for some time until your personal rate resets
- If you don’t like the new interest rate you probably want to wait 3 months after your own rate resets before you cash it out
- That way you lose 3 months of the low interest, not your high interest that you liked!
- You might hold the bond for 15 months instead of the 12-month minimum, but you’d keep more interest!
Should I Cash Out?
When you cash out your I Bonds is going to be based on when you need the money, as well as what the new interest rate will be when your I Bond renews.
If you need the money…you need the money. Right? Nothing much you can do about it if your situation calls for it.
But if the need is not urgent, keep an eye on I Bond inflation rate projections that are available a few weeks ahead of the Treasury’s announcement of new I Bond interest rates in early May and early November.
Remember, when you cash out your I Bonds you don’t earn the interest until you complete the month and that you lose the prior 3 months interest.
If you want to keep all your good interest and get the most out of your I Bonds you should cash out:
- after earning 3 months’ of lower interest and
- just after the 1st of the month.
If the Issue is WHEN
Most of the people asking me (and probably reading this) bought I Bonds in one of three 6-month periods dating back to 2021. Here they are in order:
If you bought an I Bond from November 2021 – April 2022 that I Bond earned 7.12%, then 9.62%, then 6.48% on its own 6-month renewal schedule.
Now you see the new May 2023 – October 2023 renewal rate of 3.38% and think ‘I want to cash out.’
To keep that high interest of 6.48% you need to hold on to the I Bond for 3 more months, at that new rate, so that when you cash out you lose the new, lower interest rate, and keep all your high rates of interest.
Here’s a guideline chart. It shows that if you bought in a particular month when you may want to consider cashing out.
For the example of a November 2021 purchase at 7.12% you got 9.62% in May 2022, then 6.48% in November 2022.
Then you’ll get the new 3.38% rate in May 2023.
If you don’t like the new rate, you’ll want to hold on to that I Bond through May, June, and July so that you have 3 months interest at the new rate. Then you can cash out in early August so that you lose that prior 3 months interest, and none of the 6.48% interest.
If you bought an I Bond from May 2022 – October 2022 that I Bond earned 9.62%, then 6.48% on its own 6-month renewal schedule. When it comes due for the new 3.38% rate, you might be thinking ‘I want to cash out.’
To keep that high interest of 6.48% you need to hold on to the I Bond for 3 more months, at that new rate, so that when you cash out you lose the new, lower interest rate, and keep all your high rates of interest.
Here’s the guideline chart. It shows that if you bought in a particular month when you may want to consider cashing out.
For the example of an October 2022 purchase at 9.62%, you will start getting 6.48% in April 2023. Then you’ll get the new rate in October 2023.
You’ll want to hold on to that I Bond through October, November, and December so that you have 3 months interest at the new rate. Then you can cash out early January 2024 so that you lose that prior 3 months interest, and none of the 6.48% interest.
You will hear about the new rate in May 2023, and might think “I don’t want that interest. I want to get out”. The reality is you probably shouldn’t cash out for another 8 months!
Your I Bond purchase from November 2022 – April 2023 has a fixed rate of 0.4% that stays with your I Bond for its 30-year life. That is different than the prior two scenarios above – which had a 0% “fixed rate”.
Because of that fixed interest, you may want to hold on to your I Bond as a longer-term cash-type investment. Even though you may see variable interest rates that aren’t that high, especially in 2023, you can be assured that your I Bond is designed to get more than inflation for the next 30 years!
If you’re considering holding on to your I Bond for the long term please learn more about I Bonds from some of the online resources. But if you want to hold on to your I Bond as just a short-term investment, it’s a different story. In that case, you should consider cashing out at the 12-month mark (equivalent of a 4.43% annualized rate). Or perhaps the 15-month mark (4.30% annualized rate).
Your November 2022 – April 2023 I Bond purchase will earn 6.89% over the first 6 months. Then on its renewal month, it will get the new composite rate announced in May of 3.79%.
For the Long-Term I Bond Holders
Just announced on May 1, 2023, the Treasury said new I-Bond purchases come with a 0.9% fixed rate (on top of the inflation composite rate). This is welcome, and great news for some. The fixed rate of 0.9% makes the May-to-October purchases very attractive, as this fixed rate stays with these bond purchases for up to 30 years.
One might be faced with the dilemma: do you roll over your 0.0% fixed rate I Bond in order to get the 0.9% fixed ones? If you are holding I Bonds with a 0.0% fixed rate — especially those held for five years or more — you can consider redeeming those older I Bonds for new ones with the 0.9% fixed rate. When you redeem, you will owe federal taxes on the interest earned.
But this could be a sound long-term strategy. You have until October to make a purchase of I Bonds with the 0.9% fixed rate. No rush.
If you have held the I Bond for less than five years, consider waiting. Specifically, wait an extra three months to have the three-month interest penalty apply to the lower composite rate.
Don’t forget about the Special Tax Rules
There are two big tax rules related to I Bonds Interest that could save you money on your tax return. Maybe you will want to keep holding your I Bonds if these appeal to you:
- You might be able to avoid taxes on I Bonds Interest by using it to pay for higher education.
Now there are a lot of rules that come with this benefit, especially around income limits and what counts as “qualified expense” and “eligible institution.”
Not only did you get a great interest rate on your I Bonds, but you won’t have to pay state and local income taxes on that interest.
What to Do with the Cash if You DO Cash Out?
If you cash out your I Bonds you’re probably thinking, where should I go next with my money?
It’s always good first to consider paying down debt. Review your long-term and short-term goals to make sure you have the right amount of money put towards those goals. And use the appropriate investments.
- If you need money in the short-term you should find short-term investments.
You may consider Treasury Bills, CDs, or money markets. In today’s environment, we are seeing yields in excess of 5% for short-term paper. Rates fluctuate daily but we have not seen rates like that in many years.
- If you need money in the long-term you should use long-term investments. These will be based on the level of risk you’re willing to take.
Make sure you have a process for determining which long-term investments to make. Keep in mind that there are a lot of tax planning decisions that are often connected to investing for the long-run, too.
Brandon
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